Big social media stocks Facebook and Twitter have been pummeled in recent weeks. This has caused investors to turn away from the tech sector as a whole.
But you know what? There are plenty of places within tech that still offer huge growth potential without the dark regulatory clouds over social media.
One such area is the “internet of things” (IoT) — basically the concept of connecting devices to the internet. And one pure play on IoT is a Canadian company called Sierra Wireless (TSX:SW)(NASDAQ:SWIR).
It’s small. It’s unknown. It’s largely been a disappointment.
But the shares finally caught fire on Friday, closing the day up a staggering 18.6%. Let’s take a closer look.
The big jump was fueled by Sierra’s market-thumping Q2 report.
While net earnings remained flat at $9.7 million, the company’s total revenue increased 16.4% year over year to $201.9 million. Furthermore, management now sees EPS of $0.22-$0.30 on revenue of $198-$207 million. Those midpoints are also far better than what the market was expecting.
Here’s what Bay Street is thrilled about most: Sierra’s business mix is getting more exciting.
As I mentioned, Sierra shares have largely disappointed investors in recent years.
Why? Because the company’s largest segment by far — OEM Solutions — has also been the one facing the strongest headwinds. The segment is exposed to the viciously competitive consumer hardware space. In Q2, for example, OEM revenue inched up a sluggish 2.1% to $135.2 million.
But now, Mr. Market is quickly getting pumped over Sierra’s other higher-margin segments. In Q2, Enterprise Solutions revenue jumped 34.5% to $21.7 million. Meanwhile, IoT Services revenue spiked a whopping 217.6% to $22.5 million.
To be sure, Sierra’s OEM segment still dwarfs its other businesses. But with IoT devices expected to triple from five billion to 15 billion by 2021, management is focusing on the right places going forward.
“As the IoT market expands, Sierra is uniquely positioned to provide the complete solution for customers and grow our recurring revenue base,” said IoT Services vice president Marc Overton. “We are progressing many opportunities together as we move from one-time device sales to a fully integrated device to cloud solution, with many times higher customer lifetime value for Sierra Wireless.”
The bottom line on Sierra
There you have it, Fools: an exciting tech stock that isn’t weighed down by annoying regulatory scrutiny.
If Sierra’s business mix and revenue keep trending the way they are, I can’t see how the stock doesn’t follow suit. Even after Friday’s surge, Sierra trades at a forward P/E of 21 — still on the very low range historically.
That said, the shares are pretty volatile. So, expect a bumpy ride. In fact, Sierra might only be suitable for relatively young investors with a long time horizon.
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Fool contributor Brian Pacampara owns no position in any of the companies mentioned. David Gardner owns shares of Facebook and Sierra Wireless. Tom Gardner owns shares of Facebook and Twitter. The Motley Fool owns shares of Facebook, Sierra Wireless, and Twitter.