NetGear, Inc. (NASDAQ: NTGR) is engaged in providing high-performance networking technology and internet-connected products to consumers, businesses, and service providers. The company is engaged in two segments namely, 1) Connected Home and 2) Small and Medium Business (SMB). The connected home segment is focused on consumers and consists of Wi-Fi mesh systems such as routers, smart devices, and services such as parental control, extended warranty, and support for consumers’ home network products. The SMB segment is centered on small and medium-sized businesses and caters towards business networking, LAN, security solutions, and cloud management services. As of April 26th, 2021, the company’s market capitalization stood at USD 1.19 billion.
Strengthening of switch portfolio: As of March 30th, 2021, the company announced the availability of GS316EP and GS316EPP PoE+ Gigabit Ethernet Plus switches that provides more ease of access to retail shops, and home-based businesses with greater Power-over-Ethernet (PoE) budgets. PoE’s ability to distribute both power and data over a single cable can enable the devices to be placed anywhere irrespective of the availability of a power outlet.
Introduction of new Tri-band mesh Wi-Fi: As of March 16th, 2021, NTGR announced the new Nighthawk® Tri-band Mesh Wi-Fi 6 System (MK83) that delivers more processing power than Wi-Fi 5 and can increase the overall Wi-Fi performance. It is designed to cover the whole house with high-performance Wi-Fi and can manage more devices on the network and can eliminate dead zones in every room of the house.
Robust Q1FY21 Results: The company reported a 38.25% rise in net revenue to USD 317.92 million in Q1FY21 (ending March 28, 2021) as compared to USD 229.96 million in Q1FY20 (ending March 29, 2021). The connected home segment contributed 75.77% to the total net revenue while the SMB segment contributed 24.23% to the total revenue in Q1FY21. The company reported an increase in net income to USD 22.96 million in Q1FY21 as compared to a loss of USD 4.17 million in Q1FY20.
Key Risks: The company procures its key components from a limited number of suppliers. Most of the time the semiconductor suppliers experience a shortage in components. Further, dependence on a sole source for certain key components may allow suppliers to leverage this opportunity for negotiating prices higher. As a result, the company must accept these higher prices to ensure the continuity in supply. This could adversely affect the profitability of the company. If it continues for a longer period, it can impact the operational efficiency of the company.
Outlook: The company is expecting its Net Revenue to be in the range of USD 305 million to 320 million with a GAAP operating margin to be in the range of 6.5%-7.5% for Q2FY21. The company is expecting a healthier inventory positions for Q2FY21 despite the supply chain challenges as a result of Covid-19.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation
(Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
* % Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once estimated target price is reached or if the price closes below the support level.
NTGR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Stock Recommendation: NTGR has already surged 14.70% in the past six months and is currently trading at a slightly higher end of the 52-week range of USD 21.55 to USD 46.38. The stock is currently trading above the 200 DMA levels. We have valued the stock using the EV/Sales based relative valuation methodology and arrived at a target price of USD 43.66. Considering the significant rise in the stock price in the past six-month, operating at lower EBITDA and operating margins in comparison to industry margins, and strong fundamental growth, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 38.77, up by 3.22% as of 26th April 2021.