What To Do After Netgear Jumped By Over 30%

On July 31, 2024, NETGEAR, Inc. (NASDAQ:NTGR) reported second-quarter revenue that fell by 12%. It reported a loss, worse than the year before. After the markets closed yesterday, the networking equipment firm raised its sales guidance for the third quarter.

How is it that the previous quarter's results are in steep contrast to the current quarter for this under-performing firm?

Netgear Second-Quarter Results

Last quarter, Netgear reported revenue of $143.9 million (-12.6% Y/Y). On a non-GAAP measure, the firm lost $0.74 a share. Despite the loss, the company's cash and cash equivalents increased by $4.9 million to $294.3 million.

Chief Executive Officer CJ Prober pointed out that Netgear outlined its transformation plan to create long-term value for shareholders. The company accelerated its destocking plan worth $30 million by decreasing its finished goods inventory by $22.3 million. As a result, free cash flow improved slightly, up by $387,000 compared to negative $40.15 million last year.

The most notable reconciliation items of GAAP measures to non-GAAP include stock-based compensation expenses of $5.48 million and litigation reserves of $8.2 million.

Reasons for Operating Loss in Q2

Higher costs at the inventory level are Netgear's biggest headwind. However, the firm has an optimal carrying inventory level of around three months. By balancing its finished goods against the cost of raw materials purchases, Netgear will manage risks from the chipset shortage and costs effectively.

Freight costs are another risk. CEO Prober said that freight costs surged by over $8,000 a container. That hurt operating margins by 200 basis points.

The results did not benefit from new product enhancements. For example, revenue will not benefit from the mobile hotspot feature launch until the fourth quarter. Readers may infer that Netgear needed to balance its product portfolio in the interim to maximize its operating leverage.

The firm also had legacy inventory to work down, which pressured its margins. As it exits that product phase, Netgear will work from a lower price point. Concurrently, the firm invested around $2 million in Business go-to-market. Those activities are paying off: return on investment and revenue levels are on the rise this quarter.

Third-Quarter Outlook Raised

Netgear stock is up by 32% at the time of writing in reaction to the Q3 sales guidance. The firm expects net revenue in the range of $170 million to $180 million. This is up from its prior guidance of $160 million to $175 million.

The company succeeded in launching an updated 5G mobile hotspot product earlier than expected. The stock market's strong reaction is overdue. NTGR stock scored an A+ on valuation, up from an A.

Investors should view the stock as a value play. The growth score worsened from three months ago, while the profitability grade improved only slightly.

Netgear's momentum grade will improve today after the strong rally. Its chances of earning a quant grade of "Buy" are low. The stock has not earned a profitable bullish rating since 2020. Back then, the system called the stock a buy at around $26 in June 2020. The buy rating at over $40 in March 2021 fell to a "Hold" rating a month later.

The scoring system set a neutral "Hold" rating since then over the last three years.

NTGR Stock Price Target

Wall Street analysts have a $22.00 price target on NTGR stock. However, only one analyst offers this opinion.

By the time the analyst provides a revision and the revision score rises, NTGR stock may fall. Risks are high that long-time shareholders will sell the stock to break even.

Peer Analysis

Investors do not have better alternatives. Although Ituran Location and Control Ltd. (ITRN) has better stock scores, shares did not go anywhere in the last year.

Below: ITRN stock scores better than NTGR stock on valuation and growth.

The market capitalization of all of Netgear's peers is similar, at around $500 million. This would suggest that Ituran, ADTRAN Holdings, Inc. (ADTN), Ribbon Communications Inc. (RBBN), Applied Optoelectronics, Inc. (AAOI), and Clearfield, Inc. (CLFD) are similarly risky.

Your Takeaway

Markets are rewarding investors who waited patiently for Netgear's 5G product refresh. Now that Netgear, Inc. stock reflects a higher revenue outlook, expect profit-takers to sell the stock in the coming days.

The company offers compelling upgrades for consumers and businesses. Revenue will start to improve from here as they upgrade their networking gear. However, wait for an abrupt spike to end and the selling pressure to ease in the coming weeks. When that happens, consider initiating a speculative position in the stock.

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