Better Buy: Sierra Wireless Inc. (SWIR) vs. NVIDIA (NVDA)

The technology sector is full of companies with potential, but with a nearly endless number of trends to follow, it can be difficult for investors to know which ones are leaders in their markets, and which ones are just placing bets.

Today, let's take a look at two very different companies -- Sierra Wireless (NASDAQ: SWIR) and NVIDIA Corp. (NASDAQ: NVDA) -- both of which are making big moves across a wide variety of technology segments, including the Internet of Things (IoT), driverless cars, and artificial intelligence (AI).

Each is a leader in its respective niche, but which is the better buy for investors right now?

The Internet of Things pure play

There aren't many companies that are pure plays on the IoT, save for Sierra Wireless. The Internet of Things, broadly speaking, describes the connecting of formerly isolated devices and objects to the Internet. For example, smartwatches, fitness trackers, cars with infotainment systems or driverless technology, and smart thermostats are all examples of IoT devices.

Sierra Wireless makes most of its money by selling hardware -- like cellular connectivity and Bluetooth chips -- to device makers. Sierra calls this segment OEM Solutions, and in its most recently reported quarter, that business unit brought in $135 million and accounted for 72% of the company's top line.

But as anyone who follows the tech industry will tell you, hardware sales can be fickle, and many companies are looking to long-tail recurring software sales to diversify and grow their revenue. That's why it's important to point out that Sierra's IoT services segment brought in 10% of the company's total sales in the first quarter, and the company expects that percentage to increase to 15% in the coming years.

So Sierra is betting on the IoT, but what's the real opportunity here? Research company MarketsandMarkets estimates that the IoT chip business (everything from processors to connectivity chips) will be worth $14.8 billion by 2022. That may not seem like a lot compared the broader IoT market, which could be worth more than $6 trillion by 2025. But when you consider that Sierra's revenue in Q1 was just $186.9 million, an addressable market of $14.8 billion looks huge.

In Q1, Sierra grew its OEM Solutions business by just 2%, while its IoT services segment soared by 217%. That increase was so sharp thanks to its recent acquisition of Numerex, a specialist in managed IoT enterprise solutions.

Slowing growth in OEM Solutions sales isn't a great trend, of course, but the company has new sales opportunities in the pipeline, including a deal to provide chips for Volkswagen's vehicles, which should help expand its hardware revenue in 2019 and 2020.

Sierra's shares trade at just 13 times the company's forward earnings. That makes them relatively inexpensive compared the rest of the tech sector, though investors should be ready to stomach some volatility with this small-cap company as the IoT market begins to grow.

The case for NVIDIA

Investors are likely familiar with NVIDIA. The company has received lots of attention for its graphics processing units (GPUs), which are now being used in a wide array of applications, from gaming to driverless cars to cryptocurrency mining to artificial intelligence (AI) data centers.

The opportunities for NVIDIA in the autonomous vehicle and AI arenas have helped boost investor sentiment, and pushed its share price up 1,000% over the past three years. I'll get to those opportunities in just a second, but investors considering the stock now should know that NVIDIA still relies on the gaming segment for the bulk of its sales. In the first quarter of its fiscal 2019, GPUs sold for gaming accounted for nearly 54% of the company's total revenue.

What's great about NVIDIA's gaming business is that it's a consistently huge sales growth driver -- sales jumped about 68% year over year in fiscal Q1 -- and the company dominates the discrete desktop GPU market with a 66% share.

NVIDIA's gaming business growth is certainly impressive, but it has lots of other irons in the fire. One of its most significant opportunities is in supplying graphics processors to companies who use them to power AI applications in data centers. Amazon and Alphabet already use the company's chips for cloud computing AI processing, and there are plenty of other potential customers. NVIDIA's management believes that the company's total addressable market in the AI segment could reach $40 billion by 2023.

Additionally, NVIDIA has moved rapidly to stake a claim in the semi-autonomous vehicle market. It's on the third version of its driverless car supercomputer, the Drive PX Pegasus, which processes the image information vehicles receive from their onboard cameras, and has the computing power to serve as the brains in a fully autonomous vehicle. The company is working with automakers to bring its technology to market; management says that in just a few years, Pegasus systems will be controlling fully autonomous taxis on our nation's roads.

The company estimates that its total addressable market for driverless cars will reach $60 billion by 2035. That's a vast jump from the revenue the self-driving vehicle segment currently brings on for the company: In fiscal Q1 2019 NVIDIA earned just $145 million from its driverless car tech, about 4.5% of its total revenue.

NVIDIA's shares trade at about 30 times the company's forward earnings right now, which puts its valuation about on par with the tech industry's average forward P/E. What's great about this company is that its core gaming business is very strong, even as it builds out new opportunities in AI and driverless cars. That solid foundation means investors won't have to worry too much, even if some of the company's other businesses don't develop as quickly as expected.

The verdict

NVIDIA gets the win in this match-up because of its strong gaming business and its ongoing diversification into new tech opportunities. While Sierra has a lot of potential, the company is putting all of its eggs in the IoT basket. Meanwhile, NVIDIA may be primarily a company that makes processors for gaming, but it also happens to be making serious inroads into the high-potential AI and driverless car markets. Neither of those are even close to mature markets yet, which means NVIDIA still has plenty of time to expand its footprint in these segments.

I think Sierra is still a great Internet of Things investment, but between these two companies, I'd feel more comfortable putting my money into NVIDIA.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Nvidia, and Sierra Wireless. The Motley Fool has a disclosure policy.