Sierra Wireless (SWIR) stock exploded after the company’s third-quarter earnings report -- released on Nov. 9 -- exceeded expectations on account of the soaring demand for chips used in Internet of Things (IoT) applications. Shares of the IoT specialist jumped nearly 15.8% after earnings were released.
Investors who have missed the recent pop in Sierra need not worry as the stock seems set for more upside. Let’s look at the reasons why this tech stock is still a solid bet.
Sierra Wireless is witnessing robust demand
Sierra’s third-quarter revenue came in at $82.5 million, down 27% from the prior-year period as COVID-19-related manufacturing capacity restraints in Vietnam hurt its hardware sales. However, the top-line performance was better than Wall Street’s expectations. Sierra’s adjusted net loss of $0.56 per share was also way better than analysts’ expectations of a $0.73 per share loss.
The year-over-year comparisons don’t make for great reading, and you may be wondering why Sierra stock exploded despite huge declines in revenue and earnings. That’s because Sierra management pointed out that the company had a “record backlog” at the end of the quarter as both new and existing customers continued placing orders for IoT solutions.
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The strong backlog reflects in Sierra’s fourth-quarter guidance. The company expects revenue between $120 million and $135 million this quarter, the midpoint of which would be an improvement over the year-ago period’s revenue of $120.5 million. What’s impressive is that Sierra expects to achieve year-over-year revenue growth despite the semiconductor shortage.
The chipmaker expects semiconductor supply constraints to continue throughout 2022, but it is taking steps to mitigate the challenges. For example, Sierra’s contract manufacturing partner in Vietnam is now operating at full capacity, which means that the company should be able to convert more of its backlog into revenue. The company has also deployed new manufacturing sites in China and Mexico to introduce more diversity into its supply chain and boost output.
These moves, coupled with the strong demand for Sierra’s chip modules that are used in fast-growing niches such as 5G wireless networks, Wi-Fi and Bluetooth applications, and low-power wide-area (LPWA) networks, among others, could help Sierra deliver terrific growth in 2022.
Stronger growth is in the cards
Analysts expect Sierra to post a remarkable turnaround next year. The company’s revenue is expected to jump 20% as compared to 2021, and it is expected to turn an adjusted profit of $0.07 per share as compared to this year’s estimated loss of $1.19 per share. What’s more, Sierra’s earnings are expected to clock a compound annual growth rate of 15% for the next five years.
Sierra can achieve these targets as the demand for various IoT products and services that it sells is expected to remain healthy in the future. For instance, the shipments of LPWA modules, which are critical to the functioning of IoT services, could increase at an annual pace of nearly 19% through 2025, according to a third-party estimate. That’s not surprising as LPWA modules enable IoT devices to communicate with each other in closed locations such as buildings and underground areas, have a longer life due to less power consumption, and are cheaper to operate.
In all, the demand for various IoT connectivity solutions is expected to clock an annual growth rate of nearly 21% through the next five years as per third-party estimates. So, Sierra is operating in a market that’s set for secular growth in the long run. The good part is that it seems to be benefiting from the same considering its record order backlog last quarter, which could help Sierra deliver an improved top and bottom-line performance next year and deliver more upside.
As such, investors looking to add an IoT stock to their portfolio should keep a close watch on Sierra Wireless as it works toward a turnaround in the new year.
