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Buy This Tech Stock Trading Under $20 a Share Before It Explodes Higher

By Harsh Chauhan – Jun 10, 2021 at 8:45AM

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Things are looking up for this chipmaker sitting on two major catalysts.

Sierra Wireless (SWIR -0.13%) was once a hot play on the booming Internet of Things (IoT) market before it lost its way a couple of years ago. The company has been trying to switch into a higher gear for quite some time now, but the novel coronavirus pandemic, the loss of business to competitors, and a components shortage have combined to weigh Sierra down.

However, it looks like the chipmaker may be finally turning a corner. Sierra recently delivered better-than-expected results for the first quarter and threw light on a few trends that indicate it is all set for a turnaround. Let's take a closer look at the reasons why Sierra Wireless looks primed for a comeback.

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Sierra Wireless is witnessing solid demand

Sierra Wireless' first-quarter revenue increased 4.9% year over year to $108.1 million. Revenue growth could have been higher, but it was affected by a week of production shutdown in the wake of a ransomware attack as well as supply constraints plaguing the chip industry.

These factors were offset by robust end-market demand for its products and solutions. As it turns out, demand for Sierra's offerings was 20% higher than available supply last quarter. For comparison, demand was running 15% higher than supply in the fourth quarter of 2020. Sierra management says demand will continue to exceed supply in the current quarter. According to the company's Q1 earnings presentation:

Demand remains strong in the second quarter of 2021, and we have secured hardware orders and recurring revenue that is approximately 20% above the mid-point of our Q2'21 revenue guidance. However, we continue to face a tight global supply chain environment that is constraining our ability to source all the necessary components and fully deliver to this level of demand.

Clearly, Sierra doesn't have a demand-related problem anymore. It is witnessing an uptick in demand after last year's novel coronavirus-related disruptions. The company's connectivity, software, and services revenue jumped 26% over the prior-year period to $33.7 million as its existing customers bumped up their deployments of IoT solutions. Meanwhile, Sierra also saw design wins as two customers progress into the production phase.

The company is trying to resolve the supply chain challenges that it is facing in a bid to satisfy more demand. It is using the cash on its balance sheet to increase capacity and secure components in advance. Sierra was on track to use $20 million of its cash in Q1, but it spent an additional $12 million on additional component supply as well as advance payments to secure more components.

So, it shouldn't be long before Sierra's revenue starts growing at a higher clip as it seems to be taking the necessary steps to improve supply.

Another catalyst is in the cards

Sierra Wireless has been expanding its reach beyond the IoT market into the lucrative 5G wireless space since last year. The good news is that its foray into 5G has started yielding results. The company's 5G embedded modules have been certified by the major telecom carriers worldwide, and it has already begun shipping its products for use in 5G applications across various verticals.

Sierra management says the company's 5G design win pipeline is expanding, and the business should start picking up in the second half of the year. Additionally, Sierra says that the 5G business should start witnessing significant growth from next year, and that won't be surprising as the company has been launching new products to tap into this hot trend.

Sierra recently unveiled new 5G routers and a new generation of embedded modules that are set to go on sale in the second half of the year. IDC estimates that demand for 5G routers could increase at a compound annual growth rate (CAGR) of over 21% through 2024, hitting $3 billion in revenue.

Thanks to these catalysts, it isn't surprising to see why analysts expect Sierra's top- and bottom-line performance to improve.

SWIR Revenue Estimates for Current Fiscal Year Chart

SWIR Revenue Estimates for Current Fiscal Year data by YCharts

So, investors looking to add a company that's all set to take advantage of two hot tech trends -- IoT and 5G -- should take a closer look at Sierra Wireless. The stock is trading at 22 times trailing earnings right now, but it may not be available at such an attractive multiple once growth starts picking up.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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