Shares of Internet of Things (IoT) and 5G connectivity specialist Sierra Wireless (SWIR 3.07%) have lost their wheels after a terrific start to the year, dropping substantially over the past couple of months despite indications that the business was getting back on track.
Sierra Wireless' fourth-quarter results didn't help matters either. The company's top and bottom lines turned out to be better than expected, but light guidance played spoilsport and the stock sold off. However, Wall Street expects Sierra Wireless stock to deliver 28% upside on the back of favorable trends in the IoT space. Michael Walkley of Canaccord Genuity has raised his price target on the stock to $30 from $24, implying nearly 80% upside from current levels.
All of this makes the recent dip in Sierra Wireless stock look like an enticing buying opportunity. But should you take the plunge? Let's find out.
Sierra Wireless faces near-term headwinds
Sierra Wireless had a forgettable 2020. The company's revenue fell 18% last year to $448.6 million as sales were hit by the coronavirus pandemic, design losses in the mobile computing business at two high-margin customers, and a shortage of components in the third and the fourth quarters that kept Sierra from fulfilling end-market demand. Adjusted net loss increased from $6 million in 2019 to $51 million last year.
Sierra's guidance for the first quarter also fell slightly short of its own expectations. Company management had earlier said that its first-quarter 2021 revenue would top the consensus estimate of $110 million. Management now expects $109.9 million in revenue this quarter, blaming the tight supply of chips for its tempered forecast, according to the quarterly earnings release. Samuel Cochrane, Sierra Wireless CFO, said on the earnings conference call:
There is strong demand for our products and services in the first quarter and we have secured hardware orders and recurring revenue that is approximately 15% above Street Consensus for Q1'21. However, we are facing a very tight global supply chain environment that is constraining our ability to source components and fully deliver to this level of demand.
The bigger picture looks bright
Sierra Wireless' numbers haven't been pretty of late, but there are indications of a turnaround in the company's fortunes in the coming months.
For instance, the chipmaker's recurring revenue has been increasing at an impressive pace. Sierra reported a 25% year-over-year increase in recurring and other services revenue in the fourth quarter to $116 million. The segment now accounts for 27.1% of the total revenue, having gained tremendous traction over the past year.
The services business can keep getting bigger given the pace at which Sierra is racking up design wins in this segment. Sierra exited 2020 with a 54% jump in long-term annual recurring revenue (LTARR) to $140 million, driven by growth in the number of service contracts. The services business generated $46.3 million worth of LTARR contracts in the fourth quarter, a sequential jump of 40%.
According to Sierra, LTARR is an important metric that is based on the "estimated annual recurring revenue in year three from the time a customer's program is activated." So a higher LTARR would ideally mean that Sierra customers are spending more on its services after buying their first offering from the company. An increase in this metric would also bode well for Sierra's margins, as selling additional products to existing customers costs less than acquiring a new customer.
The good part is that Sierra is confident of achieving sustained growth in this segment, targeting $200 million in LTARR by the middle of next year and $400 million by the middle of 2024.
On the other hand, Sierra Wireless' 5G business can also take off this year. The company's 5G embedded modules went on sale in the fourth quarter of 2020, and they seem to have gained traction immediately among customers. T-Mobile US has certified one of Sierra's 5G routers on its network and the carrier is expected to launch it soon. What's more, Sierra management points out that it has "secured numerous design wins for 5G modules last year with key long-term enterprise customers."
These tailwinds are some of the reasons why analysts expect a major turnaround at Sierra later in the year. According to consensus estimates, Sierra's revenue is expected to increase 5.6% in 2021, followed by a 9.8% jump in 2022. So Sierra Wireless looks like a turnaround story worth keeping an eye on, as it is taking advantage of fast-growing markets such as IoT services and 5G wireless networks.