It was almost a flat year for Sierra Wireless Inc. (SWIR, Financial) in 2016, but the stock has been performing amazingly well this year. The stock is up more than 80% year to date, supported by a couple of robust earnings reports.
Moreover, the continuing rise of the Internet of Things market also has been a blessing for Sierra Wireless as it is often called the best pure play on the growing IoT market. The company posted strong growth in each of its segments with those reports, perhaps most significantly comprising an ongoing rebound for its core original equipment manufacturer (OEM) solutions business. The stock’s fiery performance this year has raised many eyebrows keeping in mind its future growth prospects.
In the past, Sierra’s revenue was growing at a healthy rate, but its top-line growth turned negative in the fourth quarter of fiscal 2015. The company has successfully managed to return to positive revenue growth. In the most recent quarter, the company reported revenue growth of 13.3% year over year compared to a year ago.
The company has shipped more than 120 million machine-to-machine devices to date. It comprises 400 plus wireless patents. It was also the first company to introduce LTE devices. Moving onward, the company believes the growing presence of open source platforms, as well as designs, will boost the rise of these connected devices.
Sierra launched Legato, the first open-source Linux platform for embedded machine-to-machine modules around the globe, in 2014. It also introduced mangOH, an open source design for Internet of Things device in 2015.
According to a forecast report from strategyr.com, the worldwide market for Global Navigation Satellite System (GNSS) is predicted to reach $98.4 billion by 2022, representing a compound annual growth rate (CAGR) of 4.5%.
Although growing popularity of IoT devices, as well as machine-to-machine communication, continues to be one of the major trends in the market, the growth in the automotive industry will be the primary factor that will drive growth.
To gain benefit from this massive opportunity, Sierra Wireless acquired GlobalTop Technology’s GNSS module business for $3.2 million in April. That acquisition enlarged the company’s embedded solutions for markets comprising telematics, automotive as well as drones. The company plans to integrate GNSS-embedded modules into its OEM solutions.
While Sierra’s decision to tap into the rapidly growing GNSS market appears to be a good move, it will face fierce competition from well-established players like Qualcomm (QCOM, Financial). Qualcomm holds a leading position in the GNSS market and is continuously looking to tighten its grip. As a matter of fact, GlobalTop Technology is comparatively much smaller than Qualcomm, suggesting Sierra has a long way to go before it can make a dent in GNSS space.
On the other hand, the company recently announced that it has entered into a joint business relationship with PwC Canada. The IoT is forming new service-oriented opportunities, driving organizations to reorganize so they can successfully capitalize on increasing amounts of IoT data and deliver a superior customer experience.
Together, PwC Canada and Sierra Wireless can help enterprises develop and introduce transformative IoT services along with new business models.
One important thing to keep an eye on is Sierra’s gross margin, particularly in the favorable Enterprise Solutions segment. In the prior quarter, the company’s gross margin plunged to 48.3%. The company continues investing resources in upgrading its solutions, which could hurt its margins further in the year ahead.
Summing up
Shares of Sierra Wireless are up a whopping 83%. With the brutally rising stock price, though, the company’s price-earnings (P/E) ratio has also surged at a strong rate. Although the company holds a strong foothold in the IoT market, it is making several smart moves that will help it thrive in the future.
On the other hand, the company trades at a P/E ratio of 65, considerably greater than the industry’s average. This suggests that the stock is highly overvalued at the market price. Although Sierra’s business model looks stunning, shareholders should be cautious of its expensive valuation.
Disclosure: No position in the stocks mentioned in this article.
