Technology stocks are having a forgettable year so far as investors have shunned fast-growing but richly valued companies in the wake of surging inflation, Russia's war on Ukraine, and rising interest rates.
These factors have sent the Nasdaq-100 Technology Sector packing in 2022, with the index losing 26% of its value so far. However, Sierra Wireless (SWIR) has turned in a terrific performance despite the tech sell-off, with impressive gains of 36% this year. Let's look at the reasons why this tech stock has investors excited and see whether it can sustain its impressive run.
Sierra Wireless has been growing at a tremendous pace
Sierra Wireless is a provider of routers, modules, and other connectivity hardware and software for Internet of Things (IoT) applications. The chipmaker has witnessed healthy demand for its IoT products and solutions, as evident from its first-quarter 2022 results
(released on May 11).
Sierra's Q1 revenue jumped 60% year over year to $173 million. What's more, the company swung to an adjusted profit of $0.23 per share last quarter as compared to a loss of $0.26 per share in the prior-year period. Analysts were expecting Sierra to post a loss of $0.21 per share on revenue of $143 million, but it blew past those estimates thanks to the robust demand from customers for its 5G modules and routers and a stronger product lineup.
Image source: Getty Images.
It is worth noting that Sierra's top and bottom lines shot up impressively year over year despite the supply chain shortage that's plaguing the semiconductor industry. That's because Sierra ramped up its production capacity last quarter, which enabled it to produce more routers and gateways. More importantly, the company says that its procurement team was able to secure more raw materials so that it could satisfy the healthy demand for its products.
Even better, Sierra Wireless says that the order inflow for its products continues to remain strong, with customers placing orders for 2023 as well. CEO Phil Brace also points out that its order backlog is "far in excess" of what the company can fulfill, which indicates that it should be able to sustain its strong growth.
Not surprisingly, Sierra issued sunny guidance for the current quarter. The company expects $167.5 million in revenue at the midpoint of its guidance range in Q2, which would be an increase of 26% over the prior year. That's despite the divestment of one of its businesses that was completed in April this year, as well as the company's decision to dial down its home security monitoring segment to focus on more lucrative areas.
Why the stock could fly higher
We have already seen that Sierra Wireless expects strong growth going into 2023 on the back of robust growth in its orders. It won't be surprising to see the company sustain that momentum beyond 2023 as well, driven by the increasing demand for IoT connectivity. According to a third-party estimate, the global demand for IoT connectivity could rise at an annual pace of nearly 21% through 2026, which means that sales of gateways, sensors, routers, and other platforms should keep improving.
Sierra's results indicate that it is already capitalizing on this secular growth opportunity, and analysts expect the trend to continue. The company's adjusted earnings are expected to jump to $0.89 per share in 2022 from a loss of $0.82 per share in 2021, followed by estimated earnings of $1.18 per share in 2023.
The company's potential growth and the solid end-market opportunity it is sitting on should help the stock sustain its momentum and lead to more upside. Finally, Sierra stock is trading at just 1.7 times sales right now, which is a discount to the S&P 500's multiple of 2.6. It's also cheap for a company that's clocking impressive sales growth.
That's why investors looking to add a semiconductor stock to their portfolios right now should seriously consider Sierra Wireless given its attractive valuation and bright long-term prospects.
