The Internet of Things (IoT) continues to be one of the most attractive sectors in the technology industry. The IoT is a means in which to connect internet-enabled devices with each other. The demand for IoT connectivity is driven by cost savings, and the market for IoT devices is expected to hit $19 trillion by 2020.
Furthermore, by 2020 more than 65% of companies are expected to adopt IoT products — more than double the number that do today. All this points to a bullish outlook for the sector.
For investors, there is no better IoT investment than Sierra Wireless (TSX: SW)(NASDAQ: SWIR). Sierra makes digital components that connect products, including smart electricity metres, automobiles, fleet and transit vehicles, and home security systems, to the internet. It is one of the only pure-play IoT companies on the TSX.
Double-digit performance
In 2018, Sierra’s stock price took a dive, losing approximately 30% of its value. The entire tech sector was under pressure, as most suffered significant price drops.
The good news is that Sierra’s business continues to perform. Over the first nine months of 2018, Sierra has grown revenues by approximately 15% over the comparable period in 2017. Another good sign, service revenue increased to 12% of total revenue in the third quarter. Service revenue is subscription-based and recurring in nature.
In the fourth quarter, the company is guiding to $204 million in revenue at the mid-range. This would represent growth of approximately 12% over the fourth quarter of 2017.
A top-valued tech stock
Value investing has taken centre stage. Now that the market has corrected, there are plenty of bargains to be had. Sierra is one such bargain. Trading at a forward price-to-earnings (P/E) ratio of 15.36, the company is cheap for a growth stock.
Analysts are expecting average annual earnings growth of 16% through 2020. This implies a forward P/E-to-growth (PEG) ratio of 0.93 and is yet another sign of undervaluation. At a current P/E of 14.9, the company hasn’t been this cheap since 2013.
On average, analysts have a one-year price target of $30.89 per share. This implies 66% upside from today’s share price of $18.56. There is clearly a disconnect between its current valuation and expectations.
Another sign that the company’s share price is near a bottom: the number of shares short as of mid-December dropped by 25% over the last short report. If that weren’t enough, the company’s 14-day relative strength index (RSI) has been at or near oversold territory for the better part of the past two weeks. As such, it is due for a bounce.
Foolish Takeaway
Sierra Wireless is an industry-leading IoT company. It is trading at cheap valuations and has a history of double-digit growth. Investors should be rewarded in 2019.
