Better Buy: Sierra Wireless, Inc. vs. Cypress Semiconductor

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Investors today enjoy an enormous number of options when it comes to stocks benefiting from the Internet of Things -- that is, the growing trend of internet-connected devices in today's increasingly high-tech world.

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But not all Internet of Things stocks will survive and thrive over the long term. So let's take a closer look at two of the most promising companies playing central roles in the development of this burgeoning market: Sierra Wireless (NASDAQ: SWIR) and Cypress Semiconductor (NASDAQ: CY).

The case for Cypress Semiconductor

First up, Cypress Semiconductor's competitive edge received a massive boost when the company completed its $5 billion all-stock merger with Spansion two years ago. The combination effectively created a $2 billion leader in microcontrollers and specialized memories for embedded systems.

More recently, Cypress Semiconductor shares have climbed almost 17% so far in 2017 as of this writing -- just ahead of the broader Nasdaq index's respectable 13% return -- thanks in part to the company extending its habit of beating expectations with its strong fiscal second-quarter report in late April. In that report, Cypress delivered solid 26.9% year-over-year growth in quarterly revenue, to $531.9 million, notably including 30% year-over-year growth from the company's wireless connectivity segment and a new quarterly sales record set by its automotive business. Adjusted earnings also nearly doubled over the same period to $45.9 million, or $0.13 per share. Both figures easily outpaced Cypress' guidance provided three months earlier.

To be fair, Cypress' strength in automotive should come as no surprise. Industry demand for automotive chips is growing quickly, and the segment comprised nearly a third of Cypress' total revenue last year. In fact, seven of the world's top eight automotive OEMs are already developing next-gen technology using Cypress' Wi-Fi and Bluetooth solutions.

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On the consumer side -- which drove nearly 30% of sales last year -- Cypress was also the subject of encouraging words just last week from analysts at Barclays, who speculated that the company's role as a supplier to Apple (NASDAQ: AAPL) may grow with next-generation charging technology required for the upcoming iPhone 8. And more broadly speaking, Cypress has its long fingers in a variety of high-potential consumer markets ranging from smart home technology to wireless connectivity chips for gaming consoles like the Nintendo Switch.

Cypress also isn't afraid to pursue further acquisitive growth if need be. Just over a year ago, it bought Broadcom's Wireless Internet of Things business for $550 million, expanding its Wi-Fi, Bluetooth, and Zigbee IoT product lines and intellectual property. 

All told, with shares trading at below 13 times this year's estimated earnings, and assuming Cypress continues to capitalize on its many irons in the fire, I think the stock should continue to beat the market from here.

The case for Sierra Wireless

Sierra Wireless is a comparatively tiny business with a market capitalization of around $900 million, or roughly one-fifth of Cypress' market cap as of this writing. And just as its name implies, Sierra Wireless serves the decidedly more focused market for designing and making wireless communications equipment. This effectively makes it one of the few Internet of Things pure plays available to investors today.

But even as a smaller company, Sierra Wireless' relative top-line growth doesn't look nearly as impressive at first glance. Revenue last quarter climbed "just" 13.3% year over year, to $161.8 million.

However, that figure easily came in above the high end of Sierra Wireless' own guidance, which conservatively called for revenue of $152 million to $161 million. Sierra Wireless credited its beat largely to solid demand from established OEM customers and multiple programs across the automotive, energy, networking, payments, and mobile markets. This helped drive a 10% increase in revenue for its core OEM Solutions segment, to $133 million.

To a lesser extent, Sierra Wireless also enjoyed solid 44.8% growth in its smaller Enterprise Solutions segment (to $21.7 million), thanks to new products, better go-to-market capabilities and -- similar to Cypress' taste for acquisitive growth -- its purchase of wireless fleet management technology company GenX Mobile, though that deal was struck for a much smaller $7.8 million price. More than anything, Sierra Wireless' acquisitions at this stage are less about finding incremental revenue, and more about expanding its product portfolio and intellectual property.

Meanwhile, on the bottom line, Sierra Wireless' adjusted earnings tripled over the same period to $7.7 million, or $0.24 per share, crushing the high end of the company's expected $0.13 to $0.20 per share range.

So why is this so encouraging? And why are shares of Sierra Wireless up an incredible 75.8% year to date? Note only two quarters ago, Sierra Wireless was reporting negative revenue growth, as stubborn macroeconomic headwinds created a temporary lull in demand from existing OEM customers. All the while, Sierra Wireless continued investing to maintain its technological leadership, and kept racking up design wins that inevitably left it positioned to emerge a stronger company for it.

The verdict

So would investors do well to buy shares of Sierra Wireless after its recent climb? Considering its turnaround appears to be in full swing, and keeping in mind Sierra Wireless stock still sits around 43% below its early 2015 highs (when those OEM challenges first began to rear their ugly head), I think so.

More pertinent to the goal of this article, would investors do better catching Sierra Wireless on its way up rather than investing in the more stable industry leader that is Cypress Semiconductor? Again -- and with the caveat that there might well be sharp pullbacks along the way on signs of any weakness -- I think so. That's not to say Cypress won't be able to continue to beat the market, even if only by a few percent as it has so far in 2017. But for investors willing to endure more volatility and stick with it for the long term, I think Sierra Wireless stock has a greater chance to deliver outsized gains.

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Steve Symington owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Sierra Wireless. The Motley Fool recommends Barclays and Cypress Semiconductor. The Motley Fool has a disclosure policy.