In the last year, Sierra Wireless has been on a rampage! Cashing in more than 100% in unrealized gains. In the quarter revenue is up, margins have improved, the firm maintains a strong cash position, and management expects a solid next quarter.
Sierra Wireless is a strong investment in the Internet of Things; a multi-trillion dollar opportunity the Internet of Things or IoT is the concept that all products can connect to broadband internet and because of new functionality, improve efficiency and quality of life.
These include smart cities, transportation, retail, digital signs, autonomous homes, wearable tech, video surveillance, smart meters, smart grids and even public lighting.
If we take a look at the conference call from May 4, 2017, CEO Jason Cohenour explains the firm's new strategy using existing customers and new product offerings due to recent acquisitions. In addition to the OEM sales growth and the Enterprise Solutions growth, I predict that this trend will not only continue but snowball into much larger sales long term.
In the last year, SWIR is up to $28.10 from a 52 week low of $12.30 last November. On the same call Cohenour said "Overall, Q1financial results were above our expectations. Consolidated revenue was $161.8 million, up 13% on a year-over-year basis. We saw year-over-year revenue growth in each of our business segments in each of our three regions. Our year-over-year revenue growth combined with strong gross margin and good cost management led to profitability results that were significantly above our expectations with adjusted EBITDA of $12.4 million and Non- GAAP EPS of $0.24." Sierra has been able to strengthen their fundamentals, and their share price has responded.
Sierra is perfect for your portfolio over the next five years. Not only is their business expected to grow significantly but they are now going the next step in product innovation, Volkswagen AG has recently selected Sierra Wireless Air Prime AR series modules and the Legato Platform. In 2018 several Volkswagen models will use Sierra Wireless 4G LTE. The new cars will now have features like remote vehicle access, roadside assistance, diagnostics, maintenance, and the ability to set speed and boundary alerts. This technology will significantly impact Volkswagens value both as a brand and as a product. In the long term, Volkswagen wants to not only maintain their spot as the largest automaker worldwide but build their brand into the most dominant automaker. In 2017 we have seen car companies become a tech and tech firms become car firms. Sierra Wireless has picked the perfect partner to take on the automotive space.
Automotive is just one aspect of SWIR's strategy; I see the smart home and the smart city as the strongest source of potential revenue. The smart home presents a more profitable avenue, as more homeowners renovate their homes the option to "smartify" your home becomes both more appealing and less expensive every year. While the prices of the high-end Hue light bulbs have not moved much, the number of products and price points have almost doubled. Firms like Home Depot and Best Buy have consistently been the best major retailer to buy smart home products. The market is still testing the waters with smart outlet adapters and other transition products, but the real money is in the long term, fully embedded smart homes.
Implementations of a smart home could happen with new home builders like Toll Brothers (TOL) or Lennar (LEN), firms like these could start to make home automation standard in their newly built luxury construction. Then eventually fully standard in all homes. At the least, this could be a potential option when a new home buyer is designing a home. If you go the Toll Brothers website, you can help create your home. Their choices include assigning outlets to specific areas, intercoms, data jacks and more. I would be shocked if ten years from now smart home was not a standard feature or at least a home add-on. I would not be surprised if renovation contractors start building their smart home installation businesses.
Now you can still add smart home features from other firms at higher additional cost, and it is not a big deal, but that is still a big difference when talking about long term sales. The standard features critical; most common in the auto industry once a feature shifts from an upgrade to a standard feature manufacturing of this feature becomes less expensive due to increases in volume. We saw this with backup cameras move from a standard feature on a luxury car to a become standard on stock models. I see the smart home as a long-term paradigm shift that started with Bill Gates in1997. At the time smart home features were both innovative and still ahead of their time as well as expensive. 20 years later you do not have to be the richest person in the world to have a smart home.
In the last year, we have seen the creation off the smart home section, multiple ecosystem software products, and even a smart nursery section in a Best Buy weekly circular. Products like Amazon (AMZN) Alexa, Microsoft's (MSFT) Cortana, Apple's (AAPL) Siri, and Alphabet's (GOOG) Google Home have all existed for a few years, but now they are being fine-tuned to run your home in every way imaginable. Many of these products will require an embedded module, or more likely the OEM or an original equipment manufacturer will use a Sierra Wireless product. I spoke about Honeywell (HON) which I see as a leader in the smart home business; they are continually improving their smart thermostat which is now becoming a control panel for much more than the temperature.
Safety has always been a primary concern and firms have started selling network hubs to protect products. The smart nursery is a highly interesting section of the smart home opportunity, for years' baby monitors have become smart products but now there are thermometers, projectors, humidifiers, light and sounds machine, a smart rock and play sleeper, and even a smart changing pad and scale. At first, a lot of these products seem overpriced and unnecessary; that is what they said about cable TV. One day new parents will not think twice about getting a smart changing table and scale or a Viva Link Fever Scout which can track a fever while a child is sick.
The overall number of products that are coming out are impressive, Amazon's Alexa was the biggest product at CES 2017; all of this indicates a trend toward the smart home is becoming integral in businesses like construction, residential real estate and baby products. Real estate and construction are big business, and there are clear financial incentives, but don't underestimate the smart nursery. In 2015 there were 3.9 million babies born in the United States, that is around 11,000 a day. I see the smart nursery as a potential game changer for the broad adoption of the Internet of Things. If adoption can start with a new child, it could end with a full suite of smart products for that new family.
Right now, the best short-term opportunities for Sierra are smart grids, video surveillance, pipeline management, automotive, and health care. However, the biggest opportunity overall is the smart city. The smart city is a big fat government contract that every company would kill to get. There are over 50 major cities around the world that are a prime candidate to try out smart city technology. Even if Sierra were to land maybe two to three smart cities. How many sensors would it cost to turn New York City into a smart city? However, there are also significant obstacles to the smart city. Standardization is the largest barrier to smart city adoption according to a new report from Machina Research indicating that authorities could spend $ 300 Billion by 2025 on waste if IoT products do not find a standard platform to operate. I have seen products for the smart home that attempt this, but it is a major problem. Security alone could stall adoption. However, I do not see this as a problem as much as a business opportunity. One of the big tech firms could cash in if they can create this smart products platform that beats out the rest. Apple just displayed the importance of voice control software; it is very likely that the most dominant software will also become the standard for home automation.
The New York Times filmed a video of a recent Senate Intelligence Committee, at 44:40 Senator Richard Burr asks Admiral Michael Rogers a question specifically on the Internet of Things. Admiral Rogers elaborates on the security risks of IoT which indicates two things; IoT is going to expand, and there is a growing business opportunity for cyber security specifically IoT products. This question was part of the larger story surrounding the White House and the Senate Intelligence Committee requiring the leaders of the US Intelligence Community to testify. The government will be significant when deciding smart cities, infrastructure, government contracts. I want to know about smart schools? What about a smart hospital? The smart nursery will lead to smart day care. Smart, athletic fields? There is tremendous long-term demand.
Not all products mentioned use Sierra products, some don't even use products that Sierra makes, but they all contribute to the trend of adoption of this technology. Home adoption must come first before big expensive investment. The smart home is the stepping stone to the smart city; the smart city will enable a greater value of each industrial application of these products. The smart city is the stepping stone to the total adoption of industrial goods like smart grids, fleet management, building automation, and the rest of the high-value products that require large government contracts. There are trillions of dollars all over the world that will eventually get spent on the Internet of Things, that is a fact. It is just about how long it takes. The smart world is coming; Sierra Wireless is a strong opportunity.