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Warning: Avoid This Tech Stock

As investors, one of the toughest things to do is admit when you are wrong. It’s going to happen; if everyone picked winners 100% of the time, we’d all be rich.

On New Year’s Day, I wrote an article touting Sierra Wireless (TSX:SW)(NASDAQ:SWIR) as an undervalued stock that was oversold and due for a rebound year. I could not have been more wrong.

At the time of writing, the investment thesis was sound. The company had an impressive history of growing the business and earnings estimates pointed to growth in the mid-teens. Sierra Wireless was guiding to 12% growth in the fourth quarter.

What happened next caught everyone off guard.

Fourth-quarter earnings

There is no way to sugarcoat Sierra’s performance. It was an absolute disaster of an earnings report.

Let’s start with the basics. Earnings missed on the top and bottom lines; earnings of $0.25 per share missed by a penny and revenue of $201.4 million missed by $3.52 million. Revenue grew by 10% year over year, while earnings dropped by the same percentage.

Although disappointing, the quarterly underperformance was not the reason for its 25% post-earnings drop.

Dismal guidance

At the heart of Sierra’s stock price crash is the poor guidance. Poor is actually an understatement. The company guided to flat revenue growth in 2019, whereas analysts were expecting high single digits on average. Flat revenue growth is unacceptable.

The company operates in one of the fastest-growing sectors: the Internet of Things (IoT). In fact, it is one of the only pure plays in the sector and touts itself as an industry leader. Flat revenue growth is a significant warning sign, and one that came out of the blue.

To make matters worse, it also guided to negative earnings growth with earnings per share of $0.30 and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $34 million. In comparison, analysts were expecting earnings of $1.20 per share and EBITDA of $69.6 million. Ouch.

Simply put, management has failed to execute. The company attributes weakness in the auto, enterprise networking, and mobile computing segments as the source of issues. As a result, it intends to embark on a significant cost-cutting program over the next 18-24 months.

This is no consolation and is a reflection of poor execution. The IoT market is expected to hit $19 trillion and 65% of companies are expected to adopt IoT devices by 2020. This is almost double the number from today.

Foolish takeaway

My previous investment thesis was predicated on the company’s position as a leading IoT company. It operates in a high-growth market and it was expected to post double-digit growth well into the future. Although Sierra stock has since rebounded, the growth story has evaporated. Failure to execute has also led to significant trust issues. Take a pass on Sierra; there are better tech plays with impressive growth rates and reliable execution.

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Fool contributor Mat Litalien has no position in any of the stocks mentioned. David Gardner owns shares of Sierra Wireless. The Motley Fool owns shares of Sierra Wireless.

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