5 Reasons Why This Tech Stock's Recent Dip Is A Great Opportunity

May. 9.14 | About: Sierra Wireless, (SWIR)

Summary

Sierra Wireless shares dropped after the recent earnings report, but this could be an opportunity to buy into a long-term growth story.

Sierra saw record design wins in the previous quarter and the growth in machine to machine connectivity could lead to further growth going forward.

Sierra's relationship with Cisco places it in a solid position to gain from the Internet of Things.

Sierra's fundamentals are also strong, and with impressive product development, it looks like a good investment.

Sierra Wireless (NASDAQ:SWIR), a provider of cellular wireless solutions to the machine-to-machine ((M2M)) and connected device markets, has fallen 12% after reporting its first-quarter earnings on May 1. Sierra Wireless failed to meet analysts' earnings forecast by a penny, and its earnings guidance for the current quarter also fell behind analysts' estimates by a couple of cents. However, Sierra Wireless looks like a good bet long-term, especially given its supplier relationship with Cisco (NASDAQ:CSCO) and the fact that is it is well-positioned to benefit from the Internet of Things.

Solid growth seen in the results

Sierra Wireless' results were not that bad, as the company's revenue grew almost 20% year over year to a record $121.2 million in the first quarter. In addition, net earnings from continuing operations were $0.50 million, or $0.02 per diluted share, in Q1, as compared to a net loss from continuing operations of $0.70 million, or $0.02 per diluted share, in the year ago quarter.

So, Sierra's results were decent and the company could be a good buy on the drop for a variety of reasons. Let's take a look.

Design wins are gaining momentum

Sierra Wireless is experiencing strong momentum in its key market segments, including automotive, energy, networking, and mobile computing. During Q1, it secured a record number of new design wins with more than half of them representing new programs which are expected to drive incremental revenue in the future.

A record numbers of design wins also provides strong evidence of an overall increase in OEM customer activity as more companies are thinking of connecting their machines. Its design win activity spanned several markets, with solid contribution from each of its regions market segments such as automotive, networking, security and energy, including municipal lighting in many smart city deployments where it is a global leader.

An increase in design wins is attributed to some key drivers, including growth and overall market activity, Sierra's own targeted investments in adding sales capacity in key markets, and the increasing strength of its overall product portfolio. The shift from 2G technologies to 3G and 4G is also expected to improve Sierra's addressable markets going forward.

In addition, the success of its smart SL products illustrates the need for powerful embedded application capability, which enables customers to lower development costs, accelerate time-to-market, and optimize overall system costs.

Product development is key

Sierra Wireless has invested significantly in the development of its next-generation embedded platform called Legato, introduced at the Mobile World Congress in February this year. Through this solution, the company is looking to provide new and more powerful semiconductor platforms.

Legato leverages Sierra's experience and success with OpenAT, and takes its embedded application capability to a new level. Legato is an open-source tool based on Linux and is highly portable to different hardware platforms.

Legato is expected to enable developers to get their applications up and running fast, get to the market more quickly, and to leverage the power of multi-core platforms to run their entire applications directly on Sierra's module, thus leading to overall reduction in solution costs. Also, Legato is expected to add differentiation to Sierra's smart products, which will enable it to capture more market share, protect margins, and to drive AirVantage subscription growth.

During the quarter, Sierra Wireless also witnessed strength in its recently launched Airlink LS300 and GX440 gateway products, including another significant increase in revenue from Europe. It also commenced initial commercial shipments of its recently announced ES440, a gateway product designed specifically for branch office business continuity applications.

Sierra Wireless is also making solid progress with its AirVantage cloud services. In Q1, it added a record number of new AirVantage management services customers in connection with sales of Airlink gateways.

Over the long-term, Sierra expects a growing number of its AirVantage customers and subscribers to come through its OEM solutions channel. It has also been busy signing up new partners to help drive growth in its device to cloud solutions. During Q1, Sierra also collaborated with Tech Mahindra, a large global IT solutions integrator, to work together in developing and deploying M2M solutions for customers worldwide.

The Cisco opportunity

Hence, Sierra's Q1 results and achievements represent an excellent start to 2014. But things can get even better from here. Sierra has a long-time relationship with Cisco. It used to provide its modules to Cisco's integrated services routers a few years ago. Now, going forward, Cisco is betting big on the Internet of Things.

According to Cisco, the Internet of Things will be worth $19 trillion by 2020 as there will be more and more connected devices around the globe. The Internet of Things is basically a concept wherein machines connect with each other, and communicate to make lives easier. As reported by CNET --

"The idea is that your car can tell your home that you're five minutes away, which triggers your thermostat to shift to your preferred temperature. Connections range from something as small as a dog collar to a fully connected home or car. Google spent $3.2 billion to acquire smart thermostat and smoke detector company Nest to get deeper into this year.

Speaking at the Mobile World Congress trade show, Chambers said that the Internet of things will potentially have five to ten times the impact on society over the Internet itself.

As an illustration of the growth of connected devices, Chambers noted that there were only 1,000 devices connected to the Internet when Cisco was created in 1984. There were more than 10 billion connected devices in 2010, and they outnumber the actual number of people now. By 2020, Chambers said he expects to see 50 billion devices connected to the Internet."

Hence, Cisco is aiming big with the Internet of Things and Sierra can also profit from this market since it has been a Cisco supplier in the past, and now it focuses on machine-to-machine communications. This is exactly what the Internet of Things is all about -- machines connected with machines, objects connected with objects. So, Sierra Wireless has got a huge opportunity ahead of it.

Fundamentals

The recent fall in Sierra stock has made the stock cheaper. It now trades at just 10 times last year's earnings. Moreover, Sierra has a strong balance sheet with $151 million in cash and no debt. Its current ratio of 2.64 is also strong. So, the company can continue making investments in research and development in order to bring out more efficient products. Also, according to analysts, Sierra's earnings are expected to increase 21% this year, followed by 100% next year.

Hence, there are a number of factors in Sierra's favor.

Conclusion

So, all in all, Sierra looks like a solid buy from different angles. The company is investing heavily in product development and is coming out with strong solutions. Also, it can benefit a lot from the Internet of Things. As such, the recent drop in the stock is a golden opportunity for investors to buy more shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.