Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
People tend to overestimate change in the short term and underestimate it in the long term. A case in point: the Internet-connected car.
The technology to link moving automobiles and wireless networks is ready, and has been for several years. But it takes time for car companies to roll out new ideas and it takes just as long, if not longer, for mobile operators to strike deals with car companies so that Internet connectivity is baked into the price of the car.
Now, after a lot of waiting, sales of connected cars are set for explosive growth. I'm hoping to cash in on this trend in my Strategy Lab portfolio and in my real-money portfolio through my investment in Sierra Wireless Inc.
This small-cap company, based in Richmond, B.C., is focused on machine-to-machine (M2M) wireless networking. Among other products, it sells tiny, rugged modules for Internet connectivity that end up in cars made by Toyota, BMW, Ford, Chrysler, PSA Peugeot Citroën, Mercedes and Fiat. Even electric car maker Tesla uses modules from Sierra Wireless to connect its Model S luxury sedan to the AT&T wireless network in the United States.
Connecting cars to the Internet seems like a rather obvious idea and one with undoubted benefits. Wouldn't it be nice to have Netflix entertain the kids in the back seat on that summer road trip? Isn't it amazing to think that a Tesla Model S can wirelessly stream almost any song to the car's audio system just by responding to the driver's voice request? When you're leaving the office on a cold winter day wouldn't you love to use a smartphone app that connects to your car to warm it up for you? Yet relatively few new cars come with these capabilities.
Research firm SBD, which specializes in the automotive industry, estimates that 31 per cent of new cars will be Internet-connected within just five years. That's 36 million cars by 2018 – a sevenfold expansion from current levels.
Big companies are obviously taking these forecasts seriously. German software giant SAP AG hired a general manager to specifically target the connected car market.
Considering Sierra Wireless focuses only on the M2M market, and has the market-leading position as a hardware vendor in the automotive sector, the company is in a great position to grow its top line substantially over the next five years. But I take an even longer term perspective on stocks. I think in the next 10 to 15 years pretty much all cars will be Internet-connected.
It's impossible to make predictions so far out, but what happens if Sierra Wireless can remain the market leader and end up selling 30 million modules per year at $50 a piece some time in the next decade or so? It would add $1.5-billion in revenue, more than quadrupling the company's current sales. And that's just from the hardware component of sales into the automotive industry. It ignores all other markets and completely ignores any success Sierra Wireless has in building its cloud-based services platform.
The shares have risen over 40 per cent since I added Sierra Wireless to my model portfolio last September and I think the stock is still cheap. The company's market capitalization sits at only $384-million and S&P Capital IQ shows analysts expect the firm to make 66 cents in earnings per share next year. That pegs the price-earnings ratio at about 19 – a very reasonable level considering the company's growth prospects.
It seems to me that the risk in owning this company is much lower than the potential upside it offers based on the strong outlook for connected cars. Oh, and Sierra Wireless also has a strong focus on mobile payments and the energy market. Connecting the electrical grid to the Internet seems just as obvious a growth opportunity as the connected car.
If you believe the next generation of personal transportation will be Internet-connected, then I think you should take a close look at Sierra Wireless.
Chris Umiastowski