2023-06-23 16:13:14 ET
Summary
- Netgear has had negative financial results for the last 5 years.
- New advances in 5G and AI should spur its markets going forward.
- With a fortress balance sheet, it should consider initiating a dividend.
- Share buybacks continue and add to NTGR's long-term value.
Netgear ( NTGR ) is a manufacturer of network equipment. Although it is in the semiconductor sector of the market, it is one of the smaller ones by market cap, ranking 12th and way behind the two behemoths of the industry Cisco ( CSCO ) and Palo Alto Networks ( PANW ).
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NTGR's specialty is smaller routers and WiFi devices more suited to the home and small business market.
That particular market is expected to grow at a CAGR of more than 10% between 2020 and 2028.
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In the last 12 months, NTGR's total return (including dividends) of minus 22% has vastly underperformed the S&P 500's ( SPY ) plus 18%.
Later in this article, we will compare the return and sales revenue of NTGR compared to other network companies.
The question for investors at this point in time is, does NTGR represent a reasonable potential investment return, including dividends, or should investors be on the lookout for better investment opportunities elsewhere?
In this article, we will look at NTGR's prospects for the next year to try and determine the price direction out to 2024 as compared to the last year.
Netgear Stock's Key Metrics
Let's look at NTGR's financial metrics, comparing the last 3 years.
One quick look at the financial metrics chart above comparing 2020 to 2023 shows that NTGR has lower revenue, EBITDA, and EPS, especially in the last two years.
That poor performance is enough to explain the steep drop in total return (minus 44%) over that same period.
Most of the lower margins and revenue were due to excess customer inventory due to the slowdown in sales during the COVID-19 period from 2020 to 2022.
Here's CFO Bryam Murray's assessment of the inventory issue:
While we came into the quarter forecasting approximately $28 million in channel inventory reductions of both CHP and SMB products, our actual experience was a reduction of $37 million or $9 million higher than anticipated. This increase was due to an unprecedented inventory reduction by our largest service provider partner, as well as a meaningful reduction in SMB inventory by our largest e-commerce partner. This resulted in an unexpected challenge to our top line.
This led to problems related to lower margin percentages with gross margin, EBITDA margin, and free cash flow margin all down significantly from 2020.
Assuming customer inventories eventually are restored to historical levels, the margins should eventually move higher.
What Do Analysts Think Of Netgear?
Wall Street analysts and quants have decidedly different viewpoints about Netgear.
Note how bullish Wall Street is of NTGR's prospects, with a good rating of 4.00 out of 5.00.
And that's not just the current rating, NTGR has been on the analyst's buy list for almost the entire year starting last August. The quant rating has been very consistent in the last year too, with a Hold rating for most of the year and then switching to a Sell consistently over the last 6 weeks or so.
Overall, quants do not think much about NTGR's prospects with an overall rating of only 1.72 out of 5.00 which is decidedly in the Sell region.
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So Wall Street and Quants have completely opposite opinions, making one wonder if Quants know something Wall Street doesn't.
The following chart shows that NTGR's price return has fallen by more than 60% since January 2021.
I would tend to agree with the analysts that NTGR is a Buy because its evaluation is so much lower than 2021 and a turnaround is certainly possible.
How Does NTGR's Price Compare To Competitors?
A legitimate question when looking at any stock is to compare its performance with other stocks in the same market sector. If we look at NTGR's performance over the last year and compare it to other stocks in the Semi-conductor Market Sector, we can see NTGR has not performed well, with a total return (including dividends) of minus 22%.
In the following chart, we can see that NTGR has underperformed against the much larger CSCO (up 15%) and Palo Alto Networks (up 45%).
This would imply the market for network gear is up (no surprise there) and in that upmarket, NTGR has vastly underperformed.
However, future projections by Wall Street analysts are very positive, with a projected average price increase of 81%.
Dividends, Net Debt, and Share Buybacks
Netgear does not pay any dividends, but maybe they should (see below).
NTGR has been buying back shares at a relatively brisk rate, dropping the share count by 28% over the last 10 years.
As for net debt, NTGR is in excellent shape, with the current cash balance of $239 million dwarfing the minuscule $4 million in long-term debt.
Is Netgear Stock A Buy, Sell, or Hold?
Obviously, there are risks with an NTGR investment. Besides the day-to-day competitive risks, there are inflation and recession risks. One only needs to look at NTGR's performance over the last 3 years (see above) to realize that NTGR has been in a serious slump.
The risk of not returning to previous levels of revenue and inventory means the stock may continue to lag the market in spite of its potential.
But from a financial standpoint, NTGR has a robust balance sheet and, of course, a huge market for its products as 5G and AI (Artificial Intelligence) continue to expand their market.
In addition, since NTGR tends to specialize in the home and small business markets, it typically does not compete directly with larger network companies such as Cisco and Palo Alto Networks.
Not having a dividend to ameliorate any potential downside, NTGR is more exposed than some others. With its relatively large cash hoard of $239 million, NTGR could easily institute a dividend policy that would give investors another reason to buy. With only 29 million shares outstanding, Netgear could easily pay $1 share without jeopardizing its balance sheet at all.
Otherwise, Netgear should be buying back shares with both hands, since their cash on hand is more than 1/2 of their market value.
And note that NTGR's current price is the lowest of the last 5 years.
This implies that Netgear is underpriced compared to historical data and would be a reason to consider an investment.
Netgear is a Buy because of its huge turnaround potential and substantial cash balance.
For further details see:
Netgear: With $8 A Share In Cash, It's In The Bargain Bin