From Smartphones To Smart Homes Sierra Wireless Is Connecting Anything And Everything

| About: Sierra Wireless, (SWIR)

Summary

The Internet of Things has been around for years and it is still in the early stages of transforming the world with Sierra Wireless.

Right now it is just TVs, thermostats, and lightbulbs, but there are new products on the horizon.

Infrastructure like parking lots and gas distribution. Transportation and healthcare systems. Smart cities and smart homes.

As Apple and Google go side by side at the auto dealer, the next frontier is in the home.

Sierra Wireless (SWIR) is a technology firm that sells mobile computing and machine-to-machine (M2M) communication products that operate over cellular networks. They are the largest firm that does 2G, 3G, and 4G LTE Embedded modules and gateways. The products will help fill needs that we didn't know that we had yesterday. Did I forget to lock the house? It doesn't matter because I just did on my phone from 30 miles away.

There are so many different applications for Sierra Wireless products. This makes it a very interesting long-term play on the Internet of Things (IoT). From LTE advanced modules to low power LTE gateways, there is a module or SIM card to fit all IoT needs. Running gas distribution with smart metering or helping doctors with patient monitoring, every application of the Internet of Things will need a device to help it connect. This pure play is very risky given the last year of performance. Demand for home products will be soft, at least for now. In the long term, growth for the assortment of modules and gateways connecting anything and everything should be strong.

Sierra Wireless is well positioned for large shifts in consumer behavior. The long-term changes in how we live our day to day lives will greatly impact the demand for Wireless connectivity equipment. SWIR has done a great job growing their revenue over the past three years. In 2013, annual revenue was $441.9 million, in 2014 it was $548.5 million, and in 2015, it was $607.8 million. Growing revenue from 2013-2015 by 37% is solid and will hopefully continue as the IoT plays out as expected. Ability to grow revenue this fast shows not only the emerging growth of the IoT but also indicates potential long-term revenue growth. They have also turned their operating income around. In 2013, they lost $17.6 million, in 2014 they lost $6.5 million, and in 2015, their profits were $10.1 million. This healthy growth is yet another indication that Sierra Wireless is gaining further traction in their business. The numbers are just one aspect of SWIR market growth and potential. Their latest deals with Sagemcom and Parkeon show tremendous growth potential. Utilizing different fields of business like smart metering for electricity and natural gas and the implementation of smart parking make investors sit up and notice Sierra Wireless.

The industrial application of the different SWIR products could change the way businesses operate forever. Like other industrial innovators before it, the computer chip has completely revolutionized the way the world looks. These innovations could include new cash registers with a touch screen, the digital billboards that can run multiple ads in a row to increase their revenue, or millions of people watching Netflix (NASDAQ:NFLX) on anything but a TV. The fact is that the internet module is the new computer chip. It's the new wheel, it's the new pulley; it is the technology that is changing the way we do everything from consuming entertainment to distribute scarce resources. Industrial applications will see tremendous growth going forward. I don't see product growth increasing in the consumer sector until businesses advance to provide more options.

The Internet of Things has huge potential but right now the only people that can afford the high levels of lifestyle connectivity are the very wealthy. The costs of internet connected lightbulbs made by companies like GE (NYSE:GE) and Phillips (NYSE:PHG) are too high for the average consumer. This trend is similar to most high-end products; as time goes by the costs come down.

There will be two major players in the smart home business in retail and two in software for the home market. They are Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). They have car-based software which indicates another decision has been created between the two firms. As the home tech departments develop at large hardware stores like Lowe's (NYSE:LOW) and Home Depot (NYSE:HD), we should see many more options. There will be abundant hardware similar to what we have already seen in the cell phone market and the set top box market for the internet TV revolution. Right now, the automotive computer business is red hot. Apple and Google are both options. The decision to go one way or the other and subscribe to the entire ecosystem will shift to the entire home as well. This trend should eventually benefit firms like Home Depot and Lowe's, as well as new home builders and construction firms. There will, of course, be more options, more items, and more margin.

The changes in the home will be everything from new light switches to alarm systems and security locks that can be accessed through your phone. These systems, which are already available, are still pretty expensive relative to the common consumer's ability to purchase but within the next decade, they will become commonplace. Renovation or new construction homeowners will have the new, less expensive option to use the panel controls and phone connectivity that can access all of it; wireless security cameras, smart lightbulbs, window shades, smart plugs, and full home media controls. Imagine the better feeling of security that millions of Americans crave when away from home. With the ability to connect your home, there are so many added benefits, some of which haven't even been invented yet. The Internet of Things will be one of the next transformative technologies people talk about years from now as "I wish I could have gotten a piece of that."

The HDTV first came out in the late 90s when inexpensive models sold for $1,000-1,500 and very expensive models went for as much as $8,000. Today, those models are not sold and are worthless but you can get a flat screen for less than $500 and the big 20" from the 80s is now a $150 flat screen from Best Buy (NYSE:BBY). The point is that the price always comes down over time no matter how high tech or expensive a consumer product is when it comes out. The product won't maintain its value as newer technology comes along. Investors know this but it's worth making the comparison to the wide adoption of the Internet of Things in the home. The choice between smart home and a regular home will be less costly going forward.

There is a lot of risks investing in a player like SWIR. This company is for risk-tolerant investors who are ready for any possibility in the short term. The demand has shifted over the last year to a point now where it's hard to predict what will happen short term. Because it is a smaller firm, this opens investors up to more risk given the newer tech and volatile share price which fell over 50% from its 52-week high at 39.07. SWIR has traded below $10, having now rebounded to between $13-$14. Has SWIR bottomed at $13 or is there still more risk? There was a recent well-timed share buyback which gives more value to shareholders. There are tremendous risks involved with a small company like Sierra Wireless. It is a Canadian firm which exposes them to losses from exchange rates. There are also larger and more established firms with economy of scale that would undercut SWIR in price, production, and distribution. Sierra Wireless has a small market cap as well as high risk given the tremendous dip in share price over the last year. Demand has been shaky at best and there are short-term risks in 2016 and maybe into 2017.

The IoT has had a slow adoption from middle-income consumers but the potential is great. There is still great risk in this stock even with its great market potential. All investments have risk, especially emerging products which have volatile demand. The smart home is expensive and it has limited functionality outside of a few basic tasks like lighting, temperature, sound, sourcing for a media center, and even humidity control. These are massive improvements compared to when people used timers on their lights. Those same people can now buy a camera system with sensors that can update them if anything happens when they are away.

The price of installing a smart house gets very expensive, with costs going above $10,000. The technology is still relatively new. There will be new features of the high-end smart home that will justify the same high premiums as features offered today.

Consumers are hesitating to buy consumer products because there is a serious lack of them. As I went and toured multiple stores including Apple, Best Buy, Karl's Appliances, Home Depot, and the Microsoft (NASDAQ:MSFT) store, there was a clear winner and loser in selection. Best Buy had what seemed like everything IoT; their Magnolia home automation offering was very helpful and informative. Different levels of security features were offered. There were the same Hue bulbs at Home Depot and Apple. Microsoft literally had nothing… The store employee had no knowledge of the requests I made for products.

Best Buy had more to offer than anywhere else in both variety and price points. I was especially surprised at the selection of IoT products in the large appliances section. Sure your $6,000 fridge connects to the internet but just for diagnostic purposes. They are just starting to offer options for a TV on the side of a fridge made by Samsung. There aren't many applications in the home outside of music, lights and adapters. Soon there should be built-in switches and outlets as well as new small appliances. For example, there is a new crock pot that connects to your phone. Honeywell (NYSE:HON) is making some very interesting products soon. In the next 5 years, these products should develop into mainstream consumer products. Intel said there could be 200 billion connected devices by 2020. These predictions bode well for home automation; just imagine the endless possibilities.

Sierra Wireless makes the embedded module that will allow for these innovations and improvements, connecting use further than we ever thought was possible. As I said, they are the industry leader, they have grown their revenue very nicely. Large industrial projects are already using their equipment. My point is that these industry trends which I believe will come to fruition will greatly impact the wireless communication business. Sierra is very well positioned for these trends and I expect SWIR will benefit greatly from long-term changes in the demand for IoT products.

The IoT should play out well for firms like Sierra Wireless. There will be a lot of spending in both public and private sectors. This will drive embedded module demand in the long term. The money will flow to different products but they will all be using modules to connect to the internet. The future is here and the investment play is Sierra Wireless. If this high-risk play is too risky but you still want to invest in the Internet of Things, here are some other interesting stocks that I like: Always do due diligence before investing in any stock. GE is a pure industrial now and they are going to do a lot of IoT business. American Tower (NYSE:AMT) is my favorite pure-play telecom. It is a relatively safe investment on cell towers even at today's prices. Equinix (NASDAQ:EQIX) the datacenter REIT should see strong demand for more data centers and more demand for capacity of these centers as more sensors and modules generate more data. Honeywell has been making a lot of very cool products and should be looked at for more IoT possible positions. I like these companies, but I LOVE Sierra Wireless. I see great potential in the IoT for both industrial and consumer application. It's just a matter of time.

Sierra Wireless is a strong long buy

Disclosure: I am/we are long SWIR, AAPL, GE, AMT.

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.