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Better Buy: Sierra Wireless vs. NVIDIA

By Steve Symington - May 23, 2016 at 7:57PM

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These two innovative tech companies can serve two very different purposes for investors.

In the world of technology, arguably no opportunity is greater for investors than the Internet of Things right now -- that is, the growing trend of taking everyday objects and adding Internet connectivity to make them more useful. It stands to reason, then, that investors today arguably enjoy no greater opportunity than to buy and hold shares of innovative technology companies capitalizing on the Internet of Things.

Of course, there are dozens of intriguing IoT stocks out there. But in my opinion, two of the most promising businesses in the space are Sierra Wireless (SWIR -3.02%) and NVIDIA (NVDA -6.35%).

But which is the better buy today? That depends on your goals as an investor.

Image source: Sierra Wireless, Inc.

On one hand, we have Sierra Wireless, an IoT pure play that boasts a relatively small market capitalization of just over $600 million as of this writing. But Sierra Wireless also focuses on wireless machine-to-machine communication solutions -- a market that industry analysts predict could grow to a whopping $20 billion over the next four years between Sierra Wireless' three reportable segments in OEM solutions, enterprise, and cloud and connectivity products. For perspective -- and with the caveat that Sierra Wireless won't be able to capture the entire market -- Sierra Wireless' most recent financial guidance calls for full-year 2016 revenue in the range of just $630 million to $670 million. 

At the same time, the midpoint of that range also represents relatively modest top-line growth of around 7% from 2015. Sierra Wireless' revenue last quarter dropped 5.1% year over year, to $142.8 million, which may be off-putting for new investors searching for small-cap tech companies with outsize growth. Keep in mind, however, that last quarter's decline was driven almost entirely by expected softness from certain customers exercising caution in the automotive industry, and more than anything it's indicative of the chunkiness that comes with Sierra Wireless' still-small revenue stream in these early stages of growth.

Looking forward, Sierra Wireless management expects existing customer demand to normalize while more than 40 new OEM customer programs are set to ramp up through the remainder of this year -- hence its guidance calling for full-year revenue to increase despite its slow start to the year. And that will be supplemented by healthy gross margin from its enterprise segment (52.5% excluding a favorable legal settlement last quarter), and particularly strong growth from its newer cloud and connectivity segment (up 92% year over year last quarter).

In the meantime, Sierra Wireless took advantage of its previously depressed share price in Q1 with a "notice of intention to make a normal course issuer bid" -- think of it as a sort of controlled share-repurchase authorization -- under which it bought back and retired nearly 550,000 shares of stock last quarter for $6.1 million. But that still leaves around 2.6 million in shares available for repurchase under its authorization, representing around 8.4% of Sierra Wireless' total float at today's prices.

That said, Sierra Wireless stock did skyrocket more than 20% the day after that encouraging quarterly report, so it remains to be seen whether the company will continue utilizing the authorization going forward. But with its shares still trading at a reasonable 18 times next year's expected earnings, I still think investors who don't mind enduring these kinds of volatile swings (both up and down) as Sierra Wireless builds its base stand to enjoy market-beating returns over the long term.

Image source: NVIDIA Corporation.

On the other hand, we have NVIDIA (NVDA -6.35%), a veritable juggernaut in the graphics-chip industry with a nearly $25 billion market capitalization as of this writing. To be fair, NVIDIA is one of my longtime personal holdings, and the stock has risen more than 400% (excluding dividends, which NVIDIA began paying in late 2012) since I bought my first shares in mid-2010. But while the next 400% will be much more difficult to achieve growing from this significantly larger base, I'm just as excited today by NVIDIA's long runway for growth.

In fact, NVIDIA is technically expected to outgrow Sierra Wireless this year, with analysts' consensus estimates calling for full fiscal-year revenue to increase 11.3%, to $5.57 billion. And that's not just from NVIDIA's core graphics card segment, through which the company shipped an incredible 78.8% of the world's dedicated graphics cards in the fourth quarter of 2015. NVIDIA is also enjoying broad strength across each of its other platforms, including professional visualization, data-center-centric products, and automotive solutions.

According to NVIDIA's founding CEO, Jen-Hsun Huang, earlier this month, NVIDIA is seeing a sharp increase in customer engagement for its deep learning solutions, which the company describes as "a new computing model that uses the GPU's massive computing power to learn artificial intelligence algorithms." These algorithms can be used in a variety of IoT applications but have seen particularly strong early results in the developing market for self-driving cars. Led by NVIDIA's recently unveiled DRIVE PX 2 platform, NVIDIA is ensuring that its powerful GPU technology will play a central role in this burgeoning market.

On top of that -- and similar to Sierra Wireless -- NVIDIA is using its healthy balance sheet and cash flow to return capital to shareholders through dividends and repurchases. Last quarter alone, NVIDIA entered into a $500 million accelerated share-repurchase agreement in addition to paying $62 million in dividends, and it lpans to return roughly $1 billion to shareholders through dividends and repurchases -- or around 4% of its float, at today's prices -- when all is said and done this fiscal year. At the same time, shares arguably have some of this growth already priced in, trading at a more lofty 28 times next year's expected earnings.

So which is the better buy?

To be honest, I would prefer to own shares of both companies. But I also think it comes down to whether your individual tolerance for risk outweighs your desire for relative stability. Given its larger size and operating from a position of strength, I think NVIDIA offers the latter to more risk-averse investors who don't mind paying a slightly higher premium for that strength. And to own shares of Sierra Wireless requires you be comfortable with greater risk and potentially wider swings both up and down, especially as the company sits on the cusp of greatly increased profits as new OEM customer programs sit poised to ramp up and return the company to sustained, profitable growth.

In the end, though, I greatly admire both Sierra Wireless and NVIDIA, and I think both should generate impressive returns for long-term investors willing to patiently watch as their respective growth stories come to fruition.

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Stocks Mentioned

NVIDIA Corporation Stock Quote
NVIDIA Corporation
$160.36 (-6.35%) $-10.88
Sierra Wireless, Inc. Stock Quote
Sierra Wireless, Inc.
$20.85 (-3.02%) $0.65

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