The market for machine-to-machine computing isn’t massive yet, but I think it will be. That’s why I own shares of Sierra Wireless Inc. both personally and in my Strategy Lab portfolio.
For those of you who don’t read techie blogs on a regular basis, machine-to-machine (M2M) computing is tied to a trend called hyperconnectivity – the notion that if a machine or device can benefit from being connected to a private or public network (such as the Internet) then it will be.
Hyperconnectivity already exists on a person-to-person level: Think smartphones and tablets. But there is a lot of work to be done to connect machines to one another. And that’s where the exciting growth lies.
There would be obvious benefits, for instance, if your car could pass performance data back to the manufacturer, who could then use engine sensor data to diagnose a problem before it leaves you stranded on highway in the dead of winter.
Carbon monoxide sensors in your home would also benefit from wireless connectivity, allowing an alarm to be sent to local utilities and paramedic services if a dangerous situation were detected.
The list of uses for M2M wireless communication is next to endless in markets such as building security, payment processing, billboard advertising, fleet management, environmental data and more.
Last year, there were roughly 110 million cellular-connected M2M connections in the world. ABI Research, a New York-based follower of technology trends, thinks we’ll see more than 365 million by 2016. That’s small relative to the mobile phone market, but the growth rate is still a very healthy 27 per cent.
Sierra Wireless happens to be the No. 1 vendor for embedded wireless modules used in the M2M market. In 2011, its market share (by revenue) was over 34 per cent, according to ABI.
The Richmond, B.C., company isn’t just a hardware vendor either. Companies that want to implement M2M in their market need more than wireless modems. They need software and network hardware to run applications on.
Sierra understood this well in advance, so it built a platform leveraging Amazon’s huge cloud infrastructure. This is the same distributed computing network that Netflix uses to power its market-leading video-on-demand service. With Amazon’s help, Sierra Wireless can help its customers deploy machine-to-machine communication without having to invest all kinds of cash in servers and software. They can build a M2M network on Sierra’s platform, which generates recurring revenue for the Canadian market leader.
If ABI’s forecast is correct, customer will be paying more than $35-billion a year to connect cellular modems to the network. Wireless operators will take a big chunk of that revenue. But the guys who sell the modems and build software to make the modems do something useful – like Sierra Wireless – stand to do very well too.
Today, the market capitalization of Sierra Wireless is a mere $240-million. It’s a relatively small company hardly anyone pays attention to, but it’s consistently profitable and cash flow positive. Based on S&P Capital IQ data, the stock trades at for only about eight times next year’s earnings estimates. That, and the nearly $60-million in cash on the balance sheet (and growing) gives the stock a nice factor of safety.
I’m betting on Sierra Wireless to expand its revenue and profitability at a healthy clip over the next few years. As that happens, I think the market will recognize and reward the growth.
One thing that adds to my comfort level about the company is its leadership. Chief executive officer Jason Cohenour has been at the helm since 2005, and with the company since 1996. He’s a natural relationship builder, which may help explain why so many key executives have stayed on after their companies were acquired by Sierra.
Speaking of acquisitions, Sierra Wireless’s strength in M2M is the result of both internal development and the acquisition of two French companies. Integrating acquisitions is an important skill, and one that Mr. Cohenour’s team seems to do quite well.
Given the exciting market opportunity over the next several years, it wouldn’t surprise me if Sierra was snapped up by a larger firm. After all, it’s done much of the heavy lifting by consolidating the industry to create a market leading firm.
As a long-term investor, I like the prospects for Sierra Wireless. But should my time as an investor come to an end early as the result of Sierra’s sale to a larger company, I won’t complain.
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