The Motley Fool

Sierra Wireless, Inc. (TSX:SW) Is a Long-Term Growth Gem

It seems that everywhere we turn of late, there are new and innovative products that are connected to the internet. The list of devices is seemingly endless, with everything from refrigerators and washing machines to automobiles and even footballs effectively becoming smart devices.

Across that wide variety of devices, there’s one thing in common — the use of embedded modules and modems built by Sierra Wireless, Inc. (TSX:SW)(NASDAQ:SWIR).

Sierra is the de facto leader in that segment, with a commanding market share in the IoT sector, which is one reason why the company is often regarded as a great IoT investment for the long term. Market experts peg the value of the IoT sector to be worth in excess of US$17 billion within the next few years and expect the segment to provide annual double-digit growth over that period.

Investors are still mixed over Sierra

Investors have been mixed on Sierra over the past few quarters, as Sierra continues to adjust to becoming a pure-play IoT company. In the most recent quarterly results announced last month, where Sierra’s OEM segment realized a paltry 2% increase in revenue, with gross margins dropping 3% over the same period last year.

In the first fiscal of 2018, Sierra reported US$186.9 million, representing a year-over-year improvement of 15.9%. Despite that growth, GAAP net income in the quarter came in at a US$8.4 million loss compared with a US$92,000 loss posted in the same quarter last year.

While the OEM remains the largest segment of the company, enterprise solutions and the IoT services segments are showing a steady improvement with each passing quarter, now accounting for nearly one-third of Sierra’s overall revenue.

This is an important factor that investors should not be too quick to dismiss.

The IoT segment realized revenue of US$22.5 million, and the Enterprise Solutions segment saw revenue growth of 34.5% to US$29.2 million. These two segments will continue to provide strong growth for the company, becoming more central to the direction Sierra is taking.

Final thoughts: Should you invest in Sierra?

Long-term growth should be the primary focus for investors considering Sierra, as the stock could still fluctuate greatly on external factors. By way of example, a disruption at an automotive supplier last year resulted in weaker-than-expected results for Sierra before revenues returned to former levels. A similar disruption was noted during this quarter; a potential impact of US$0.03 per share in the next quarter was noted by management.

As Sierra continues to branch out and draw in more clientele, the possibility for short-term volatility remains, but overall the stock remains a great opportunity for investors looking to diversify into the growing IoT segment for long-term growth.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Demetris Afxentiou has no position in any stocks mentioned. David Gardner owns shares of Sierra Wireless. The Motley Fool owns shares of Sierra Wireless.

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