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This article is part of a series called The Future is Smart: How the Internet of Things is changing business.

Follow the series at tgam.ca/internet

A few years ago, Sierra Wireless made those little devices from Bell, Rogers or Telus that you plugged into your laptop's USB port to hook up with the Internet.

Perfectly useful – but it was an increasingly commoditized business, with selling prices and profit margins dropping. So the company ditched the operation and used the sale proceeds to reinvest in making something a little bit more complex: cellular modules that the makers of automobiles and other things could use to connect their products to the Internet.

In doing so, the Richmond, B.C.-based company has become Canada's purest play on the Internet of Things, the concept of a whole array of physical devices connected to the Internet, gathering and sharing data, and helping us make better decisions. Investor enthusiasm for IoT has helped propel Sierra Wireless' shares over the past few years: It closed 2011 struggling to top $7, but pushed the $60 mark by December, 2014.

Since then, there's been a pullback, to Friday's close of $33.39. Growth in its core business has slowed, and its attempt to once again climb up the food chain into enterprise and cloud solutions has been blemished by missed targets in the enterprise business. Many analysts are wary, which suggests to me that Sierra Wireless shares have almost – but not quite – settled back to attractive levels.

The stock's bulls, however, say the current levels are a ripe buying opportunity for a company playing a key role in the Internet of Things. "Sierra Wireless sits at the heart of the biggest secular trend in tech today," says Richard Tse of Cormark Securities, who has a "buy" rating and a $50 target price. "For now, Sierra Wireless is already playing a big part in that transition. Add accelerating revenue and acquisitions, and this stock has the potential to go higher – way higher."

First, an explanation of Sierra Wireless's place in the tech world, courtesy of Thanos Moschopoulos of BMO Nesbitt Burns. The company's original equipment manufacturer, or OEM, business represents 85 per cent of sales. Sierra takes semiconductors from companies like Qualcomm, adds them to circuit boards, and makes cellular modules for other companies' equipment. It also offers engineering services and ensures the modules are compliant with dozens of international cellphone carriers. Examples of uses: The connected cars of Toyota and Chrysler, or Nespresso institutional coffee makers that can report back to the coffee company that refills or a service call is needed.

"Let's say I'm Toyota," Mr. Moschopoulos says. "I have a build-versus-buy decision. I could get the chip from Qualcomm, but in order to put it into a car, I'd have to then design my own module and circuit board, I'd have to go to 30 different carriers globally to get the product certified to connect to their network, I'd have to develop programming tools to write codes to use that module as part of my overall system – it's a big headache. Some companies do it – GM, for example, does all this stuff in-house – but others say, 'Hey, it's just a lot easier to accelerate my time to market and save money by going to someone like Sierra who's done a lot of the work for me.'"

Sierra Wireless has about one-third of this "machine-to-machine" market, with two competitors at about 20 per cent apiece. "There's always been a concern that someone like Huawei or Ericsson could come in and crush the space, and that's always a potential risk, but for the time being, Sierra has demonstrated it's been able to maintain its market share," Mr. Moschopoulos says.

Sierra Wireless's enterprise business takes the next step, with finished products that stand alone, like a "gateway" box that allows a retailer to connect its point-of-sale machines with the Internet, allowing rapid data sharing with corporate headquarters. This business is a higher-margin one, with more potential for recurring revenue from "cloud" services. It's also one in which Sierra Wireless has missed targets recently, citing product-cycle issues.

At the same time, growth is slowing in the OEM business, as a fabulous 2014 of growth rates in excess of 20 per cent turns to a future when management expects sales gains more in the 10 per cent to 15 per cent range.

All of that has contributed to the stock selloff that's shaved 40 per cent from the shares' peak price on Jan. 5, Mr. Moschopoulos says. Yet, he still has a "market perform" rating and a $38 target price. "They've had a very strong growth rate …. They're a leader in their space, we know IoT is going to be a strong growth market, as more devices have connectivity. These guys have a big market share and seem to be maintaining and even growing that share. So it just comes down to what you want to pay for the stock, and at this point, I think the valuation is appropriate."

Similarly, analyst Tim Quillen of Stephens, who describes the past couple of years as "a little bit of a wild ride in the stock," says "the only issue I've had with the stock is that the reality of the Internet of Things sometimes is not quite as exciting as the concept of Internet of Things, and I think the stock started to reflect a little bit of the hype in the market, especially at the end of 2014. So I like the story, I like the competitive position, I like the growth prospects, but I will like the stock even better as the valuation starts to reflect a little bit more of the reality of the Internet of Things versus the mythology."

Mr. Quillen, who has an "equal-weight" and $34 target price, says "we're getting much closer to attractive valuation levels." His and Mr. Moschopoulos's views are reflective of consensus, as just three of 16 analysts covering the shares have "buy" ratings, according to Bloomberg data.

Cormark's Mr. Tse is one of those three bulls. He cites recent acquisitions of Wireless Maingate and Accel Networks (the latter deal completed Friday) as adding higher-quality revenue, because profit margins are higher, and customers buy services, creating recurring revenue that doesn't exist with one-off deals to buy a piece of hardware. "With the company continuing to add scale organically and via acquisitions, we believe there continues to be a lot of upside to the name," Mr. Tse says.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 3:36pm EDT.

SymbolName% changeLast
QCOM-Q
Qualcomm Inc
+0.02%169.17
TM-N
Toyota Motor Corp Ltd Ord ADR
-0.17%251.71

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