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Better Buy: Sierra Wireless vs. Qualcomm

Ashraf Eassa, The Motley Fool

If you're looking to buy a stock to help you gain exposure to the wireless industry, two companies you might have heard of are Qualcomm (NASDAQ: QCOM) and Sierra Wireless (NASDAQ: SWIR). Although both of them will get you the exposure that you seek, it's important to realize that these companies play different roles in the wireless ecosystem and have dramatically different business models. 

Let's explore those differences so that you can make a more informed investment decision if you're trying to pick between the two companies' stocks.

Qualcomm VP of corporate communications on stage at a Qualcomm event.

Image source: Qualcomm.

Chips and patents versus modules

Qualcomm can be thought of as two distinct businesses. The first part of Qualcomm's business, known as Qualcomm CDMA Technologies (QCT), builds chips that provide the processing capabilities as well as wireless connectivity for smartphones, as well as adjacent markets like automotive and the Internet of Things. Qualcomm also licenses out its wireless patents and, as a result, collects significant royalties from makers of cellular-enabled devices (irrespective of whether those devices use Qualcomm chips). 

Sierra Wireless, on the other hand, doesn't design its own wireless chips. Instead, it builds products around wireless chips like the ones that Qualcomm makes (in fact, Sierra Wireless uses Qualcomm chips in some of its products) then sells them into various markets. For example, here's an excerpt from the company's most recent annual filing explaining its OEM solutions offerings:

Our OEM Solutions segment includes embedded wireless modules and optimized tools for OEM customers that
are used to integrate wireless connectivity into products and solutions across a broad range of industries including automotive, transportation, enterprise networking, energy, sales and payment, mobile computing, security, industrial monitoring, field services, healthcare, and others. Within our OEM Solutions segment, our embedded wireless modules product portfolio spans 2G, 3G, 4G, and LPWA technologies as well as Bluetooth, Wi-Fi, and GNSS technologies for use in IoT applications.

So, when thinking about Qualcomm and Sierra Wireless, you need to ask yourself this: Do I want to own a company that makes fundamental wireless technology building blocks (Qualcomm), or do I want to own a company that takes those building blocks and crafts solutions around them (Sierra Wireless)?

Big or small?

There's no way around it -- Qualcomm and Sierra Wireless operate on vastly different business scales. Qualcomm generated about $22.7 billion in revenue during its most recent fiscal year, while Sierra Wireless turned in just $793.6 million in sales. Qualcomm's market capitalization currently sits at a little under $63 billion, and Sierra Wireless' stands at just over $450 million.

A company with a small market capitalization may see significant volatility in its shares, while a company with a large one is generally expected to be more stable.

Another thing to consider is that larger companies can often have a harder time growing than smaller ones thanks to the law of large numbers. For some perspective, if Sierra Wireless were to grow its revenue by $800 million, that would represent more than a doubling of the company's sales. If Qualcomm were to add that same amount to its fiscal-year 2018 revenue, that'd represent just a 3.5% boost.

Now, for some perspective, analysts think that Qualcomm is set to see its revenue decline by 10.4% during the company's current fiscal year,while Sierra Wireless is expected to see its sales dip by 0.5% during its own fiscal year 2019. For the subsequent fiscal year, those figures are expected to be 8.1% and 8%, respectively.

So, another question you need to ask yourself is whether you want to invest in a very small company or a much larger one.

Dividends

One significant advantage that Qualcomm has over Sierra Wireless is that the former pays a significant dividend -- the stock currently yields 4.81% -- while the latter doesn't. Dividends provide a relatively predictable source of returns in what is inherently an unpredictable market. 

Though Qualcomm clearly wins in the dividends department (Sierra Wireless simply didn't show up to the fight), it is worth noting that an unfavorable ruling in the FTC's case against Qualcomm could wreak havoc on Qualcomm's entire business model (the company's lucrative wireless patent licensing business might not be so lucrative in the event that the worst happens), which is a risk to the company's earnings power and, ultimately, its dividend.

How to pick between these two stocks

Ultimately, Qualcomm and Sierra Wireless are two fundamentally different companies with different product portfolios, go-to-market strategies, and operating scale. Investors who would rather own a large, established company that also happens to pay a dividend should take a closer look at Qualcomm. If you're more interested in a small company and all of the risks and benefits associated with investing in one, then doing additional due diligence on Sierra Wireless might be the way to go.

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Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of and recommends Sierra Wireless. The Motley Fool owns shares of Qualcomm. The Motley Fool has a disclosure policy.