Sierra Wireless (NASDAQ: SWIR) stock's steady start to 2019 came to an abrupt end in February after the company released underwhelming fourth-quarter 2018 results and guidance. The stock cratered big time, as investors were expecting the Internet of Things (IoT) specialist to step on the gas, but weakness in its largest business segment seems to be getting the better of it.
Market intelligence firm IDC estimates that IoT spending will increase 14% in 2019. However, Sierra's flat revenue guidance for the year tells us that it isn't going to benefit from that trend. In fact, the company seems to be in a tough situation, as it has hired a third-party consultant to help it reduce costs and boost profitability.
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Let's see what's going wrong at Sierra and when investors might expect a turnaround.
The root of the problem
Sierra Wireless delivered impressive revenue growth of nearly 15% in 2018, though some of it was driven by the Numerex acquisition that boosted its IoT services revenue. More specifically, the chipmaker's IoT services revenue increased a whopping 161% in 2018 to $90.5 million on account of that acquisition, but that's just 11% of the total revenue.
The OEM (original equipment manufacturer) solutions business, which supplies nearly three-fourths of Sierra's total revenue, increased just 5% in 2018. But the chipmaker is anticipating design losses in the PC OEM segment this year, which will be enough to offset automotive growth that will be driven by the ramp-up of two new programs at Volkswagen.
Sierra admits that it shifted focus from the PC OEM space to focus on other fast-growing areas such as automotive, which eventually caused it to lose its footing. The company says it remains a "meaningful supplier" to certain Tier 1 and Tier 2 customers in PC OEMs, but CFO Dave McLennan made it clear during the latest earnings conference call that "others will go away as the design wins end."
Additionally, the margins of the PC OEM business are higher than the entire OEM business's average, while automotive margins sit at a lower level. So it is not surprising that Sierra is expecting non-GAAP earnings of just $0.30 per share in 2019 as compared to last year's figure of $0.90 per share.
Wait for a turnaround
Clearly, 2019 is going to be a painful year for Sierra Wireless, and a turnaround will arrive only when the company's OEM business starts picking up the pace. The company believes that the rollout of fifth-generation (5G) wireless technology will eventually boost the OEM business, so it is focused on developing new 5G products that will allow it to regain the lost PC OEM business.
Sierra has already started making moves to regain lost ground in this space, displaying what it calls the "industry's first 5G mechanical module sample" at the Mobile World Congress. However, investors shouldn't expect quick gains, as the company anticipates it will be at least three to four years before such designs result in meaningful revenue gains.
More specifically, Sierra management is targeting annual revenue in excess of $1 billion in the next three to four years. This means that the company should start delivering top-line growth from 2020 onward after a flat performance this year.
Analysts estimate that the chipmaker will witness 8% revenue growth in 2020, which makes sense considering that two-thirds of organizations surveyed by Gartner expect to deploy 5G by next year. Additionally, Sierra forecasts that its automotive design wins will deliver $1.1 billion in revenue over the next five years, and that excludes any new business that the company could land over this period.
Sierra Wireless investors will need to be patient, as the stock might remain under pressure until there are concrete signs of a turnaround. This could present an opportunity to buy more stock on short-term weaknesses, since catalysts like 5G and connected cars should ultimately help it make a comeback from next year.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Gartner and Sierra Wireless. The Motley Fool has a disclosure policy.
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