Sierra Wireless' (SWIR -0.48%) stock market surge came to a grinding halt last week after the company's second-quarter earnings report threw up a major red flag. The Internet of Things (IoT) and 5G chip specialist crashed after it failed to provide near-term guidance because of coronavirus-driven disruptions at a contract manufacturing facility in Vietnam that are hindering production.
Sierra Wireless pointed out that it could experience "a material negative impact on our financial condition and results of operations, including production capacity, revenue, gross margin percentage, gross margin dollars, profit, and cash in the third quarter of 2021." This forced the chipmaker to pull its Q3 guidance -- but savvy investors shouldn't lose sight of the big picture.
Sierra Wireless sizzled in Q2
Sierra Wireless' second-quarter revenue increased 19% year over year to $132.8 million, which easily exceeded the higher end of its guidance for sales in the $118 million to $122 million range. Loss per share slipped from $0.36 in the prior-year period to $0.03. Wall Street was anticipating a bigger loss of $0.15 per share.
The better-than-expected results can be attributed to two factors. First, Sierra has been working to bolster its supply chain so that it can meet the solid end-market demand that it has been witnessing. The company spent extra cash in the first quarter to secure additional components and make advance payments to suppliers. This helped Sierra beat its revenue expectations and deliver impressive year-over-year growth.
Second, Sierra exercised tight control over its costs during the quarter to reduce its loss. Non-GAAP operating expenses were down 13.6% year-over-year last quarter to $46.4 million. This helped Sierra deliver adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $4.3 million during the quarter, compared to a loss of $8.7 million in the year-ago period.
However, Sierra was unable to sustain its recent stock market momentum due to circumstances out of its control. The company's press release pointed out that its "ability to build and ship cellular embedded modules and gateways to our customers in the third quarter of 2021" has been impacted due to COVID disruptions at a contract facility in Vietnam.
The chipmaker is taking steps to mitigate the problem by resuming limited production at the facility while ramping up output at other locations. But the pulled guidance indicates that the problem is going to take some time to mend. Sierra reminded investors that "the ongoing impact of these interruptions is highly uncertain."
Sierra management estimates that the orders it cannot ship this quarter will move into Q4, with some order shipments potentially moving into the first quarter of 2022. All of this indicates that the next few months may be tough on Sierra stock -- but the company could make a solid recovery once it gets past the supply chain issues.
Don't miss the big picture
Sierra Wireless management emphasizes that the demand for its chips remains strong. That's not surprising, as the company has been winning business with key players in the IoT space.
Microsoft, for instance, chose Sierra's managed IoT solution last month for asset tracking. Sierra's offering will be integrated throughout Microsoft's Azure IoT Central platform, allowing developers to connect and manage devices. The managed IoT services market is reportedly growing at an annual rate of 27.8% as per a third-party estimate, so it wouldn't be surprising to see Sierra gain more traction here after landing a contract with Microsoft.
Meanwhile, Sierra has built up a solid pipeline of design wins for 5G chipsets. The company had 15 design wins in this space last year, and it has built upon that in 2021 by striking partnerships with the likes of Deutsche Telekom. Given these tailwinds, it is not surprising to see that Sierra's top and bottom lines are expected to improve substantially in the coming years.
As such, investors looking to add a tech stock to their portfolio can consider using the drop in Sierra shares as a buying opportunity. It offers a way to take advantage of two fast-growing verticals, and the company could regain its mojo once the near-term issues are taken care of.