Is Sierra Wireless Looking Strong Going Into Q4 Earnings?

Sierra Wireless (NASDAQ: SWIR) has fallen prey to the market's shortsightedness in the past few months despite delivering on its promises. Investors were unhappy with Sierra's guidance for the December-ended quarter, with the company calling for a not-so-exciting 8% year-over-year jump in revenue and a slight drop in earnings.

But Sierra now has a chance to prove the doubters wrong when it releases its fourth-quarter results after the market closes on Feb. 8, and it's likely that it will come out on top this time. Here's why.

Different components of the Internet of Things, represented by a cluster of transparent hexagonal icons.

Image source: Getty Images.

Earnings set to drop, but investors shouldn't panic

Wall Street expects Sierra to earn $0.25 per share on revenue of $176 million, in line with the company's own guidance. By comparison, the company reported $0.27 per share in earnings in the year-ago quarter, and this seems to have hurt investor confidence.

But investors seem to be missing that Sierra's earnings were bound to decline in light of its stock-for-stock acquisition of Numerex. The Internet of Things specialist issued 3.6 million shares to close this deal, so it isn't surprising the company is expecting a drop in the bottom line.

Sierra's stock has dropped 36% over the past six months. This massive stock price erosion has made the stock cheap as it now trades at 27 times last year's earnings, well below the industry average of 35.6. What's more, Sierra gets cheaper at 16.8 times forward earnings, thanks to potential bottom-line growth.

So the recent drop has opened up an attractive entry point for investors looking to take advantage of the Internet of Things (IoT) space, especially because Sierra Wireless looks all set to step on the gas this year.

Sierra is sitting on impressive catalysts

Sierra Wireless looks set to accelerate its revenue growth in 2018 thanks to the ramp-up of new customer programs. For instance, the company expects material revenue contributions from a number of automotive programs set to kick-start in the second half of 2018, including a few with Volkswagen.

The German auto giant has selected Sierra's wireless connectivity modules to power high-speed connectivity across three automotive programs spanning budget, luxury, and electric vehicles. Volkswagen is the world's largest automaker, with estimated sales of 10.7 million units in 2017.

More importantly, the automotive space will be a long-term catalyst for Sierra Wireless. Raymond James analyst Steven Li estimates that vehicle connectivity could be worth as much as $3 per share for Sierra and could boost its organic growth by 5 percentage points.

But automotive isn't the only big play for Sierra Wireless this year. The company recently announced that its embedded wireless modules can now be deployed on T-Mobile's NB-IoT (NarrowBand-Internet of Things) network. NB-IoT is one of the standards of low-power wide-area (LPWA) technology that's used to enable connectivity between IoT devices.

This standard is crucial for the deployment of IoT services, as devices based on it have a long battery life of 10 years and enable connectivity in hard-to-reach spaces such as within buildings or underground. Not surprisingly, the NB-IoT chipset market is expected to expand at an annual pace of almost 61% over the next four years as IoT adoption gains traction, according to Orbis Research.

Sierra is well placed to tap this opportunity. T-Mobile, for example, will deploy its NB-IoT network across the U.S. by the middle of 2018. What's more, Sierra management claimed in the last earnings call that its LPWA modules are being tested by "leading carriers" in North America, so the company could score more contract wins for enabling IoT connectivity.

In all, it won't be surprising if Sierra's top-line growth gets a new lease of life this year. Analysts expect the same, as they forecast the company's revenue to increase over 17% in fiscal 2018, compared with last year's estimated 11% jump.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Sierra Wireless. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.