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Sierra Wireless Inc downgraded despite contract wins

“We don’t have much visibility regarding the profitability of these larger contracts."

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Momentum has undoubtedly picked up for Sierra Wireless Inc., as demonstrated by the stock’s more than 85 per cent gain so far in 2017.

This comes as the Richmond, B.C.-based provider of mobile computing wireless connectivity solutions continues to win contracts, such as its recent design deal with Volkswagen AG.

Yet some believe Sierra’s share price has gotten ahead of itself, with its valuation recently hitting 15x estimated EBITDA for 2018.

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That includes Raymond James analyst Steven Li, who downgraded the stock to market perform from outperform on Monday.

He highlighted the fact that Sierra’s high-volume contract wins, such as the most recent one with VW, come at lower margins. He also noted that they don’t fully ramp up until 2019.

“We don’t have much visibility regarding the profitability of these larger contracts,” the analyst said in a research note, adding that every point of margin contraction would need four points of revenue growth just to offset.

So while these contracts could push Sierra’s revenue growth up to 15 per cent or higher, from the current range of six to eight per cent, it’s not all smooth sailing.

“They also carry some gross margin risks and depending on where the margins end up, some (or all of it) may already be priced in current estimates,” Li said.

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