Now’s not the time to buy Sierra Wireless, National Bank says

Its transition away from hardware shows promise, but National Bank Financial analyst Richard Tse says Sierra Wireless (Sierra Wireless Stock Quote, Chart: TSX:SW) is fairly priced right now.

On Thursday, Sierra Wireless reported its Q3, 2018 results. The company lost (US) $1.03-million on revenue of $203.4-million, a topline that was up 17.9 per cent over the same period last year.

“We had strong growth in revenue and adjusted EBITDA on a year-over-year basis in the Third Quarter,” CEO Kent Thexton said. “We continued to strengthen our position as the leader in Device-to-Cloud IoT solutions and our two highest margin businesses – namely Enterprise Solutions and IoT Services – increased to 27% of total revenue in Q3.”

Tse says the quarter was in-line with his expectation, but the company’s fourth quarter guidance was soft. The analyst characterized where he feels SW is now.

“Sierra Wireless continues to be a name that’s well positioned within one of the notable secular themes in technology today –the Internet of Things where the number of connected devices globally is expected to reach 75 BB connections in 2025 according to IHS. In our view, Sierra’s edge is that it remains a leading player by market share when it comes to providing modules in that market which in itself is a channel for other services and products.

But Tse adds that it is still very early days in the company’s transition.

“The challenge is that the Company still remains largely a hardware business that’s subject to rapid product cycles, pricing pressure and invariably cost of sales risks that come with a hardware business as we’ve seen in recent years with components and now with their customers. Yet, we believe the Company is on a path towards services which we’ve been suggesting a harder pivot to for many years. In our view, it appears the change in CEO could finally be adding more emphasis to that shift as it was underscored on the Company’s conference call – we see that as positive when it comes to de-risking the challenges of the hardware business while adding a recurring revenue stream (valuation re-rating). That said, it’s early in the shift and the guidance provided suggests the stock is reasonably priced.”

In a research update to clients Friday, Tse maintained his “Sector Perform” rating and one-year price target of (US) $20.00 on Sierra Wireless, implying a return of one per cent at the time of publication.

Tse thinks SW will post EBITDA of (all figures USD) $48.9-million on revenue of $798.9-million in fiscal 2018. He expects those numbers will improve to EBITDA of $64.3-million on a topline of $837.3-million the following year.