In the Bf Gf Portfolio, I am allocating some of my capital to stocks that can benefit from megatrends that are paving the way of the future. I am trying to get my foot into companies that are benefiting from sunrise industries rather than making bets on ‘undervalued’, sunset industries. As some of these trends may not be so obvious or mainstream yet, do keep in mind that my allocation for such stocks is very small to reflect the risks present. My recent buy was Sierra Wireless (SWIR), on 10/4/15 at a price of $37.37.
I bought SWIR as it is a company that is set to benefit from the Internet of Things(IOT), in particularly, machine-to-machine communications (M2M). If you were even bothering to guess the teaser blog post I wrote earlier, maybe now you will be cursing me for my terrible attempt of a joke. Hahaha! I am sorry…
IOT is set to be a 19 trillion dollar industry that is on the brink of explosive growth, as forecasted by analysts. How true is that, only time will tell. But the thing that I like about SWIR is the fact that it is currently a market leader in the M2M industry, with 34% market share. As you all know by now, I am attracted to companies that own a large share of the pie, as I believe the winning advantages tend to be skewed toward them.
Products and Services
1. AirPrime Embedded Wireless Modules – 2G,3G,4G, Wireless Modules that are used in industrial automotive and mobile computing applications.
2. AirLink Intelligent Gateways – Rugged devices that can be easily deployed in harsh environments for connectivity.
3. AirVantage M2M Cloud – An integrated set of services providing companies everything they need to create and operate their connected products and services.
4. Sagemcom – Communication products for private railway cellular networks.
AirPrime Embedded Wireless Modules
SWIR customers include Tesla, Ford, Toyota, BMW, Peugeot, Cisco, Vodafone, Nespresso, Honeywell, GE, Fujitsu, etc.
A quick glance at the financials of SWIR from Morningstar made me dig up their annual reports to find out why their revenue started dropping after a record 2010 all the way till 2012.
In 2011 – management cited a reduction in revenue due to decreased revenue from 2 huge clientele Barnes and Noble ( from $64M to $0.7M -discontinuation of their 3G ebook reader), and Clearwire ( $32.3M to $8.4M – Clearwire left the dual-mode broadband device market.)
In 2012 – discontinuation of AirCard (mobile broadband business unit, which was sold off to NetGear)
2013 – 2014 sees a pick up in revenue due to their renewed focus on M2M and strategic acquisition of companies like InMotion and Legato.
Data taken from the last Q42014 results showed an increasing trend in revenue. Gross margins maintained at around 30%.
As of the latest Q42014 results, earnings are still in the negative. Earnings in 2012 an 2013 were only positive due to a sale of some parts of their business. However, they are generating a substantial amount of FCF and earnings loss is improving compared to 2011.
If SWIR can maintain their gross margins and continue increasing revenues, earnings may become positive by next year. I believe a Price to Sales ratio of 2.1 is fair enough for me to enter at the current price but the financials are not strong enough to warrant a bigger bet from me… yet.
– Management is still unproven in their renewed focus in the M2M market
– Financials are still not strong enough yet, although it shows signs of improving
– Competitors fighting for a larger share of the pie. Seems like everybody wants a piece of the IOT market.
Again, I am betting that IOT will become mainstream and that Sierra Wireless will stand to benefit from it. By selling off their AirCard unit, the management has announced that they are focusing fully on the M2M market and their recent acquisitions seem to provide them the advantages to continue building a moat around their market share. Until the financials reflect good management execution, and strong evidence arises to show that their moat is in place, SWIR will remain a tiny portion of the Bf Gf Portfolio.
We shall have to wait and see what the future brings 🙂
Interested to see what other stocks we will pick to benefit from megatrends of the future? Subscribe to us, and we will share with you the Bf Gf Watchlist of stocks that we will buy when the market corrects! Also, do stay tuned as we unveil the Bf Gf Portfolio!