NetGear is soaring, and key investors are as bullish as ever

Investing.com -- It’s an exciting time to be a shareholder of NetGear (NASDAQ:NTGR ).

Following years of COVID-19 struggles and the bloated inventory issues that have haunted the company since then, there may finally be light at the end of the tunnel for the beleaguered networking equipment maker.

In an unscheduled update late September 11th, 2024, NTGR announced it had successfully settled a major legal dispute with TP-Link, receiving a $135 million payment. The company also said it plans to launch its next-generation 5G mobile hotspot in Q3, sooner than prior guidance of a Q4 launch.

The two developments resulted in NTGR significantly improving its Q3 guidance, boosting expected revenue and operating margins.

The market clearly appreciated the long-overdue good news—shares soared over 30% in midday trading on Tuesday.

Not everyone was caught by surprise, however. Some long-term investors in the company saw the good news coming and believe the best is still ahead.

Let’s explore what exactly happened and what’s next for NTGR stock.

NTGR Update in Numbers $135M, or $103.6M before taxes net of associated fees– the company received from its settlement with TP-Link. Q3 launch of 5G product lines – a full quarter ahead of NTGR’s prior plan for a Q4 launch. Q3 revenue of $170M-$180M – an increase from prior guidance of $160M-$175M. Q3 operating margin of 48%-51% - significantly above prior outlook of (15.3%) – (12.3%.)

Activist investor sees more to come

The update didn’t surprise Marc Chalfin, head of the Florida-based Winward Management, an activist hedge fund.

Chalfin has been a vocal NTGR bull since May of this year when he issued a letter to Netgear’s management and said he took a 4.2% stake in the company.

In the letter, Windward’s head highlighted NTGR’s depressed valuation, strong cash position, and EBITDA-positive business and pointed out several value-creation opportunities, including expanded share buybacks and the potential spinoff of the company’s best-performing segment. He also mentioned potential enforcement action against Chinese competitors, such as TP-Link, as another upside catalyst.

In an exclusive conversation with Investing.comat the end of May, Marc Chalfin estimated that the company could achieve an enterprise value of $500M to $1B, far above the $50M-$100M EV at the time his letter was published.

Investing.com had a chance to catch up with Mr. Chalfin again to discuss the latest developments. Here are the biggest takeaways:

The TP-Link Story

NTGR may have gotten a solid settlement with its Chinese counterpart, but the story runs much deeper, as Marc Chalfin sees a real chance of governmental enforcement action against TP-Link, up to a full ban in the US.

Just last week, Reuters reported that Republican Representative John Moolenaar and Democratic Representative Raja Krishnamoorthi, who lead the House Select Committee on China, requested a Commerce Department probe to verify “the threat posed by (China-affiliated small office/home office) routers —particularly those offered by the world's largest manufacturer, TP-Link.”

Chalfin points out that TP-Link’s U.S. market share is bigger than NetGear's. Any move to ban the Chinese company or limit its presence in the U.S. would provide a significant boost to NetGear’s top and bottom lines.

Earlier this week, the US House also passed the ROUTERS Act, a bipartisan legislation “to safeguard Americans' communications networks from foreign-adversary controlled technology - including communist China.”

Wi-Fi 7 and 5G Upgrade cycles

The Wi-Fi 7 upgrade cycle was one of the catalysts mentioned by Chalfin in his original letter, and he reiterated the idea once again, noting that the new standard is beginning to get real traction – just a few days ago, Apple (NASDAQ:AAPL ) announced that its latest iPhone lineup will support Wi-Fi 7.

The sooner-than-anticipated rollout of the 5G product lines is another potential catalyst.

Share Buybacks

One of Chalfin’s key ideas in his May letter was to use the company’s growing cash pile ($290M+ before yesterday’s settlement announcement) to buy back stock.

While NTGR still has limited ability to perform buybacks due to trading window restrictions, Marc Chalfin said that his conversations with management indicate they’re open to sizeable buybacks as soon as they’re legally allowed.

What analysts think

Analysts at Raymond James were also quick to react to the TP-Link update.

The news encouraged the firm, with analysts saying they “believe this near-term cash infusion provides flexibility for growth investments at a favorable time when inventory/channel dynamics are right-sizing/improving and can amplify capital returns potential.”

“We think NETGEAR has notable catalysts (including actions related to TP-Link), but we remain more conservative with not having this near-term guidance uplift roll through our out year expectations,” they continued.

Where is NTGR stock headed?

Raymond James analysts raised the price target to $22 from $17, “considering the influx of cash from the TP-Link settlement providing optionality for growth/cash generation/shareholder returns to support a higher valuation at present.”

When Marc Chalfin disclosed his stake back in May of 2024, NTGR was trading under $14. As the shares are nearing $21 today, Chalfin has only one thing to say: “I’m more bullish here than at $14.”

In his estimate, the company can return to $100M of annual EBITDA over the next few years, up to $140M-$150M if the political tailwinds fully materialize. At that point, he sees the shares business worth up to $800M-$1B, or about $40/sh, excluding cash and the effect of any potential share buyback.

Source: Investing.com