Warning: Avoid This Tech Stock

Sierra Wireless, Inc. (TSX:SW)(NASDAQ:SWIR) stock crashed after a disappointing fourth quarter and dismal guidance.

| More on:
Road sign warning of a risk ahead

Image source: Getty Images.

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.

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 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.

More on Tech Stocks

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Business man on stock market financial trade indicator background.
Tech Stocks

1 Growth Stock Down 50 Percent to Buy Right Now

There are plenty of growth stocks in the market worth considering, but Shopify (TSX:SHOP) looks like one of the best…

Read more »

Woman has an idea
Tech Stocks

Prediction: 1 Stock That Could Trounce the Market 

The TSX has been favouring tech stocks, but not this one. However, it has the potential to trounce the market…

Read more »

clock time
Tech Stocks

Long-Term Investing: 3 Top Canadian Stocks You Can Buy for Under $20 a Share

These three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Businessman holding AI cloud
Tech Stocks

AI Will Transform Everything: Investors, Be Early Adopters and Buy These 3 Stocks

Investors looking to invest in companies doing big things in AI should consider these three stocks for their portfolios.

Read more »

stock research, analyze data
Tech Stocks

Forget Shopify: These Unstoppable Stocks Are Better Buys Today 

Should you consider buying Shopify stock while rivals consider a buyout or should you go for stocks with a stronger…

Read more »

A colourful firework display
Tech Stocks

2 Potentially Explosive Stocks to Buy in March

These two growth stocks are destined for many more years of market-crushing returns.

Read more »

edit CRA taxes
Tech Stocks

TFSA Millionaires Are Learning They Can Still Be Taxed

If you day trade stocks like Shopify (TSX:SHOP) in a TFSA, you may be taxed.

Read more »