In the middle of July, Sierra Wireless (NASDAQ:SWIR), the Cisco (NASDAQ:CSCO) supplier, looked like an enticing opportunity. The stock was trading at beaten down levels, but it has now made a remarkable comeback. After releasing its second quarter results at the end of July, Sierra Wireless is up more than 13%. The company came out with a strong performance, and due to the opportunity in machine to machine (M2M) communications and the Internet of Things (IoT), more upside cannot be ruled out.
But before taking a look at Sierra's prospects, let's see how it fared in the second quarter.
Strong results set the tone for a solid future
Sierra posted revenue of $135 million, an increase of 23.2% from last year. The company's earnings more than doubled to $2.6 million, or $0.08 per share, from $1 million, or $0.03 per share, in the year-ago quarter. Sierra's adjusted EBITDA was $6.8 million, up from $4.9 million last year. Clearly, Sierra is doing well, and a look at its prospects will tell us that it will continue improving.
According to ABI Research, Sierra Wireless is the leader in the M2M embedded cellular module market, commanding 34% of the market. As a result, the company is well-positioned to profit from the Internet of Things. Cisco believes that the Internet of Things will be a $19 trillion opportunity by the end of the decade. To enable this concept, there will be a whopping 50 billion objects that will get connected to the Internet by 2020. This is where Sierra comes into play, as it provides "cellular wireless solutions to the machine-to-machine and connected device markets" across the globe.
Increasing connectivity applications to drive growth
The increase in connected devices will ultimately create demand for Sierra's modules. Marketing research firm Infonetics Research recently issued an upbeat forecast regarding the M2M market. The research firm stated:
The services built upon mobile machine-to-machine modules, such as fleet management and connected car, are already a sizeable business and are growing much faster than traditional business lines. We look for the market to accelerate beginning in 2015 as M2M services inflect and module sales shift toward higher-ARPU 3G and 4G systems, ultimately just about doubling to $2.9 billion in 2018.
This is just one facet of M2M connectivity, as IDC forecasts that spending on IoT connectivity components and applications will shoot up to $7.3 trillion by 2017. Hence, there is no doubt that the market opportunity for Sierra is indeed strong.
Products and design wins to drive growth
The company already is reporting solid growth due to increasing sales of its 3G and 4G embedded modules. Its chips are finding applications across markets such as automotive, mobile computing, energy, sales, payments and networking. Looking ahead, Sierra looks set to sustain the momentum, as it has been recording design wins to improve its performance.
For example, during the second quarter, Sierra landed a design win at an energy customer for smart metering applications. In addition, Sierra Wireless is moving into the Chinese auto market as it recorded a design win at a domestic Chinese car maker.
Additionally, Sierra's HL line of products is gaining traction in the market. The scalable and flexible product line is one of the key reasons behind its strong market share. But Sierra is not resting on its laurels. The company recently launched the next generation of its smart module product line, based on its new Legato embedded software platform.
According to Sierra, both large OEMs and small developers are demanding high-powered multi-core hardware platforms. The Legato embedded software platform is providing the same, enabling the company to accelerate revenue growth and reducing the risk and program costs. The Legato and AirVantage platforms are being used by developers to create IoT solutions.
Moreover, the recently launched ES440 enterprise gateway of Sierra is witnessing good demand. The company believes that this product line will contribute strongly to revenue in late 2014 and beyond. Sierra Wireless is also making progress in bolstering its AirVantage M2M cloud subscriber and customer base by landing more customers. Last quarter, AirVantage won over more customers, including a big U.S. gas and electric utility and a major digital billboard operator.
Better than the competition
Moreover, these design wins and product innovation will allow Sierra to stay ahead of peers such as Telit, which is also rolling out new products to tap M2M. For example, Telit's ATOP 2.5G platform finds applications in on-board units in the automotive telematic market. According to Telit, "ATOP 2.5G can stand alone as a complete solution for GPS/GSM-based road pricing and eCall applications." But, since Sierra is now focusing on 3G and 4G modules, its technology is more future proof.
Hence, Sierra is making good progress in the business. At the same time, the good thing is that Sierra is cheap. The stock trades at less than 11 times last year's earnings. In addition, its earnings are expected to grow 18% this year and 107% next year. Moreover, Sierra is a debt-free company, and it also has a strong cash position of $168 million.
The company has a leading position in the market, and it could improve further due to growth in connectivity applications. The company has impressive product development, along with strong fundamentals, making it a stock worth looking into.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.