Canada’s mid-cap technology landscape has a few notable players, and Sierra Wireless Inc. (TSE: SW) is one of them.
The wireless communications equipment maker has enjoyed double-digit growth over the past five years and is poised to make an even bigger leap into Internet of Things (IOT), a new technology paradigm that is transforming everyday objects into data processing machines. Depending on who you ask, IOT could be worth $19 trillion in the not-too-distant future. This figure represents the public, private, and indirect contributions of IOT and connected devices.
Sierra Wireless’ Recent Quarter in Context
Sierra Wireless has emerged as one of the most stable growth companies in Canada’s technology landscape. That’s why its most recent quarterly earnings report was so shocking. The British Columbia-based company reported non-GAAP earnings per share (EPS) of $0.25 on revenues of $201.4 million. Analysts had expected an EPS of $0.26 on revenue of $204.56 million.
While that may on the surface appear like a significant shortfall, for a company like Sierra, context is everything. For starters, the company had boosted its earnings by a compound annual growth rate of nearly 30% over the past five years, a figure expected to reach 38% in 2019. During its most recent two-year stretch, Sierra surpassed analysts’ revenue and earnings expectations by 100%.
CEO and President Kent Thexton has nevertheless underscored the need to take a proactive approach to address the most recent shortfall. As a result, he announced new cost-cutting measures over the next 12-18 months, which include centralizing internal R&D, boosting subscription-based revenues and consolidating global sales teams.
IOT: The Value Driver
Despite missing the mark on Q4, Sierra Wireless solidified its leadership pace in one of the world’s fastest-growing industries: IOT. Revenues from the company’s IOT services were up 89.1% during the quarter and 161% for the full year. Less than two years ago, the company acquired Numerex Corp., a machine-to-machine enterprise solution enabling IOT convergence. Prior to being acquired by Sierra, Numerex was recognized as the best overall platform by IoT Evolution as well as best security platform by Compass Intelligence.
Sierra’s IOT prowess can be further gleaned by looking at another value metric: its addressable market. In 2015, the company’s addressable market – the company’s revenue opportunity for existing products and services – was worth $3 billion. By 2021, that figure is expected to grow tenfold to reach $30 billion.
Sierra has also identified 5G technology as a major growth driver of IOT applications and has released a whitepaper explaining how this new paradigm will impact current wireless strategies. This comes as telecommunications giants like Verizon Communications Inc. (VZ) have poured considerable resources into 5G technologies to onboard more wireless subscribers.
If you believe the IOT hype will become reality, Sierra Wireless is a mid-cap technology stock you should carefully consider. The company’s stock, SW, is trading at a significant discount following the Q4 earnings call last month. As the following chart shows, SW has significantly underperformed the bull market over the past few years. This partly reflects a lacklustre environment for Canadian stocks more generally (the chart below SW is the TSX Composite Index).
Sierra Wireless Stock Price (TSE: SW)
S&P/TSX Composite Index
By most measures, Sierra Wireless is dirt cheap. If the IOT revolution continues as expected, the company could become a solid niche player among mid-caps.