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This Hot Internet of Things and 5G Stock Has Soared 30% in 2021 -- Can It Continue?

By Harsh Chauhan - Jan 29, 2021 at 9:00AM

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Two big catalysts can help this chipmaker sustain its terrific start to the new year.

Sierra Wireless (SWIR -2.42%) has quickly set aside the disappointment of its tepid third-quarter earnings report last November. Shares of the Internet of Things (IoT) and 5G wireless specialist have soared big time in January 2021 -- something that looked unlikely just a month ago as it was handicapped by several headwinds.

So, what has caused this terrific and surprising rally in Sierra stock? More importantly, can it sustain this momentum for the remainder of the year? Let's find out.

SWIR Chart

SWIR data by YCharts

Sierra Wireless investors have reasons to cheer

Sierra Wireless investors are an enthusiastic lot. They seem to be upbeat about the company's long-term prospects and have been ignoring the sliding top line. Their resilience has been rewarding as Sierra stock price has jumped over 90% in the past year.

SWIR Chart

SWIR data by YCharts

The new year has brought more good news for Sierra Wireless investors. The company recently announced that its revenue for the fourth quarter of 2020 will beat Wall Street's expectations. Analysts expect Sierra to post an adjusted loss of $0.26 per share on revenue of $116.3 million. This is encouraging given that Sierra had failed to provide formal guidance when it released its third-quarter results in November 2020.

The chipmaker added that its revenue guidance for the first quarter of fiscal 2021 will also top the consensus estimates of $110 million. It is worth noting that Sierra's revenue will still be substantially lower on a year-over-year basis despite the better-than-expected top line. The company had generated $174.3 million in revenue in the fourth quarter of 2019 and $157.6 million in the first quarter of 2020.

However, the above-mentioned quarters included revenue from Sierra's now divested automotive embedded business that generated $166 million in revenue in 2019. Sierra completed the sale in November 2020, so the year-over-year revenue comparisons would be skewed. The chipmaker had made this move in a bid to increase its focus on the more profitable 5G and the IoT markets instead of the low-margin automotive business.

Honeycomb with icons of different Internet of Things items

Image source: Getty Images.

The shift seems to be bearing fruit as Sierra's fourth-quarter revenue guidance points toward quarter-over-quarter growth. The company had generated $113.4 million in third-quarter revenue excluding the contribution from the automotive business. What's more, analysts predict that Sierra's results are on track to improve as the year progresses.

The company's 2021 revenue is expected to increase 7% over 2020's levels to $475.8 million. Its 2021 loss is expected to go down to $0.43 per share from what is expected to be a loss of $1.43 per share in 2020. Sierra looks capable of delivering these improvements in 2021.

Why a turnaround looks likely

There are two factors that could help Sierra Wireless stage a comeback on the financial front in 2021. The first is the company's shift toward providing IoT solutions as compared to the earlier business of selling chips. Sierra is now focused on selling end-to-end IoT connectivity solutions to factories, telecom carriers, and for other applications such as fleet tracking, wireless monitoring, and asset tracking.

These are fast-growing markets that Sierra is going after. The IoT managed services market is expected to clock a compound annual growth rate (CAGR) of nearly 28% through 2026, hitting $159 billion in value at the end of the forecast period, according to a third-party estimate. The industrial IoT market is also anticipated to clock a CAGR of over 21% over the coming years as per another estimate.

The deployment of 5G wireless networks is the second reason why Sierra Wireless looks set for a stronger year. Sierra had said last year that it expects 5G wireless technology to start generating revenue in 2021, driven by the launch of a wide variety of cellular modules, routers, and gateways supporting the new wireless technology.

Sierra was sitting on more than 15 design wins for its 5G offerings last year, so it won't be surprising to see the company take advantage of this segment's growth in 2021 and beyond. After all, the demand for 5G chipsets is expected to grow at more than 63% a year through 2027.

As such, it won't be surprising to see Sierra Wireless sustain its terrific rally and turn out to be a hot growth pick for 2021 and beyond, giving investors a good reason to hold on to shares as they could be in for more upside.

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