NETGEAR, Inc.

NTGR Details

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, 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, and 2) Small and Medium Business (SMB), which caters towards business networking, LAN, security solutions, and cloud management services. As of May 27, 2021, the company’s market capitalization stood at USD 1.18 billion.

Launch of Smart Parental Controls Service: On May 25, 2021, the company announced that its trademark NETGEAR Smart Parental Controls service has been made available on select Nighthawk WiFi routers and Orbi Mesh WiFi systems. NTGR also stated that its availability would increase on WiFi 6 routers and mesh systems in the coming months. Smart Parental Controls helps parents to manage their children’s online activity across all their connected devices, including gaming consoles and Smart TVs.

Smart Parental Controls (Source: Investor Overview, April 21, 2021)

Introducing Orbi Pro WiFi 6 Mini: On May 11, 2021, NTGR announced the launch of the Orbi Pro WiFi 6 Mini (SXK30) Dual-band Mesh System, which is designed for small businesses and home-based offices. This system enables network streams to be securely separated from each other, for example by creating a work-from-home network stream, a learn-from-home network stream, an entertainment network stream, and a guest/customer network stream.

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. Revenue from the Connected Home segment increased by 46.31% to USD 240.92 million in Q1FY21, vs USD 164.66 million in Q1FY20. 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 limited or sole sources. This dependence may allow suppliers to leverage their importance for negotiating higher prices. Further, NTGR depends on a limited number of third-party manufacturers for substantially all of its manufacturing needs, and if the manufacturers experience any delay, disruption, or quality control problems in their operations, the company’s business and brand could suffer.

Outlook: The company expects the net revenue for Q2FY21 to be in the range of USD 305.0 million to USD 320.0 million, with GAAP operating margin ranging between 6.5% and 7.5%. NTGR anticipates a healthier inventory position for Q2FY21 despite facing supply chain challenges as a result of COVID-19.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Data Source: REFINITIV, Analysis by Kalkine Group)

• % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

NTGR Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: NTGR has increased by 20.87% in the past 6 months and is currently leaning towards the upper band of the 52-week range of USD 23.20 to USD 46.38. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 45.35. On the technical chart, the next support level is USD35.26. Considering the strong outlook for the business, robust balance sheet, associated risks, and current valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 39.32, up by 1.31% as of May 27, 2021.

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

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.