"As the 'Internet of Things' evolves from an interesting concept to a business reality, the incentives for enterprises and original equipment manufacturers to build connected machine-to-machine applications have become too great to ignore." That's what Sierra Wireless' (NASDAQ:SWIR) VP of marketing development, Larry Zibrik, wrote last month for RCR Wireless -- and the same is true for investors.
Connecting the Internet of Things
The Internet of Things, or IoT, is the connection of formerly unconnected "things" to the Internet, which allows those devices to communicate with each other and with us. The Internet of Things is still in its infancy right now and, because there are no clear winners yet, the potential for investors is huge.
Sierra Wireless' business focuses on machine-to-machine communication (M2M). Its small, wireless, embedded modules are placed in everything from coffee makers to Tesla's electric cars and wireless lighting systems in cities.
Most of these modules work by connecting a device to a carrier's cellular network -- and Sierra does it more than most companies. The company says its modules make up 34% of all worldwide embedded cellular M2M modules, and it shows no signs of giving up that position.
Last month, the company hit a milestone of 100 million shipped connected devices since it opened its doors in 1997, and just launched the first open source M2M platform, called Legato. Sierra Wireless' position in the M2M market has lead ABI Research to rank the company as the top embedded M2M module company in the world.
And there's still plenty of room for growth. A recent report from Infonetics Research said, "We look for the market to accelerate beginning in 2015 as M2M services inflect and module sales shift toward higher-ARPU 3G and 4G systems, ultimately just about doubling to $2.9 billion in 2018."
This is great news for Sierra Wireless, not just because of its current dominance in the M2M market, but also because it's a leader in high-speed connected modules. The company is currently on its third-generation 4G LTE connected module, and just received certification for the module to run on Verizon's top-rated network.
But Sierra Wireless also holds lots of potential in the management of connected devices. Sierra creates enterprise cloud solutions that allow companies to manage and track their connected things. This will become a growing part of Sierra's business as companies create more M2M devices, and need a way to control and track them. For reference, Gartner expects 20 billion connected IoT devices by 2020.
Sierra Wireless makes the majority of its revenue from selling its wireless modules to OEMs. In its Q2 earnings, which ended in June, the company saw its OEM Solutions revenue increase nearly 23% year over year, while sales from Sierra's second-biggest revenue generator, Enterprise Solutions, increased 27% year over year. But for the company to outlast the Internet of Things hype, it will need to make some adjustments.
With a market cap of just $760 million, Sierra Wireless is a relatively small company that could face a turbulent road ahead. Investors considering this stock should understand that the relative infancy of the Internet of Things -- paired with Sierra Wireless tying its horse to the burgeoning industry -- means the stock could experience a lot of ups and downs.
While the company's a clear leader in M2M connectivity, fellow Fool and senior analyst for the Motley Fool's Stock Advisor Jim Mueller said Sierra needs a better balance between its module sales and its software solutions. Sales to OEMs are driving the company forward right now -- and account for 85% of revenue -- while enterprise solutions make up just 15%. But enterprise revenue needs to start balancing out OEM hardware sales, because Sierra will make more money over the long term by selling software and services to companies than it will from its wireless modules and gateways.
I think there's a lot of potential for Sierra Wireless in IoT, particularly if it can get companies to sign up for cloud management software to help lock in future revenue. But investors should keep in mind that a pure IoT play like this could come with some volatility along the way.
Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Gartner, Sierra Wireless, and Tesla Motors. The Motley Fool owns shares of Sierra Wireless and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.