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Should Investors Exit From This Small-Cap Communications Equipment Stock – NTGR

Apr 11, 2022 | Team Kalkine
Should Investors Exit From This Small-Cap Communications Equipment Stock – NTGR



NETGEAR, Inc. (NASDAQ: NTGR) provides consumers, businesses, and service providers with high-performance networking technology and internet-connected products. Its two operating segments are 1) Connected Home, which offers Wi-Fi internet networking services such as Wi-Fi mesh systems, routers, intelligent devices, subscription services, and so on, and 2) Small and Medium Businesses (SMB), which provides low-cost business networking, LAN, security, and cloud-based services.

Why should Investors make an Exit?

  • Fall-in topline and bottom line: The company's net revenue fell 6.94% to USD 1.17 billion in FY21 (ended December 31, 2021) from USD 1.26 billion in FY20, owing to a 15.29% drop in sales from the Connected Home division. Furthermore, its net income for FY21 was USD 49.39 million, down 15.28% from USD 58.29 million in the previous year.
  • Industry Lagging Margins: The company's Gross, EBITDA, and Net Margins have improved year over year. However, in FY21, its Gross, EBITDA, and Net Margins were 31.3%, 7.3%, and 4.2%, respectively, significantly lower than the industry medians of 53.8%, 17.5%, and 7.4%. Below-industry margins suggest that the company lacks competitive strength against its peers.
  • Long Cash Conversion Cycle: The company's cash conversion cycle has deteriorated significantly from 138.5 days in FY20 to 167.4 days in FY21. Its cash conversion days remain higher than the industry average of 100.8 days, showing that it takes longer to convert inventories to cash.
  • Adverse Technical Indicators: On the weekly chart, NTGR prices are trading below the downward sloping trend line and facing the same resistance. Furthermore, the momentum oscillator RSI (14-period) is currently at ~32.03 level, indicating a bearish trend. On the weekly chart, the price is trading below the trend-following indicators 21-period and 50- period SMA, which may act as a resistance level for the stock. An important support level for the stock is placed at USD 19.50, while the key resistance level is placed at USD 27.50

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

NTGR's stock price has been on a bearish trend throughout the year, fallen 42.96% in the past twelve months and is currently leaning towards the lower end of its 52-week range of USD 22.78 to USD 41.96. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 21.50.

Considering the decline in fundamentals, industry lagging margins, long cash conversion cycle, current valuation, and bearish technical indicators, we recommend a "Sell" rating on the stock at the current price of USD 23.03, up 0.43%% as of April 11, 07:55 AM PDT.

3-Year Technical Price Chart (April 11, 2022, at 07:55 AM PDT). Source: REFINITIV, Analysis by Kalkine Group

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.