NetGear is growing and key investors are as bullish as ever via Investing.com

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

After years of struggling with COVID-19 and the bloated inventory issues that have haunted the company ever since, there may finally be light at the end of the tunnel for the beleaguered network equipment maker.

In an unscheduled update at the end of 9/11^th2024, NTGR announced that it had successfully settled a major legal dispute with TP-Link, receiving a $135 million payout. The company also said it plans to launch its next-generation 5G mobile hotspot in Q3, earlier than earlier indications of a Q4 launch.

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

The market clearly appreciated the long-awaited good news – shares were up more than 30% in midday trading on Tuesday.

Not everyone was surprised, however. Some long-term investors in the company saw the good news coming and believe the best is yet to come.

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

NTGR update in numbers

• $135 million or $103.6 million pre-tax, excluding related charges – the company received from its settlement with TP-Link.
• Q3 launch of 5G product lines – one quarter ahead of NTGR’s previous plan for a Q4 launch.
• Q3 revenue of $170-180 million – an increase from previous guidance of $160 million-$175 million.
• Q3 operating margin of 48%-51% – well above the previous perspective of (15.3%) – (12.3%)

The activist investor sees more to come

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

Chalfin has been a vocal NTGR bull since May of this year, when he sent a letter to Netgear management and said he had taken a 4.2% stake in the company.

In the letter, Windward’s chief highlighted NTGR’s low valuation, strong cash position and EBITDA-positive business, and outlined several opportunities for value creation, including expanded share buybacks and the potential spin-off of the company’s best-performing segment. the company. He also cited potential enforcement actions against Chinese competitors such as TP-Link as another positive catalyst.

IN A exclusive conversation with Investing.com in late May, Marc Chalfin estimated that the company could achieve an enterprise value of $500 million to $1 billion, well above EV’s $50 million to $100 million at the time of publication of his letter.

Investing.com caught up with Mr. Chalfin again to discuss the latest developments. Here are the biggest takeaways:

The TP-Link story

NTGR may have reached a solid deal with its Chinese counterpart, but the story goes much deeper, as Marc Chalfin sees a real chance of government action against TP-Link, up to and including an outright ban in the US.

Just last week, Reuters reported that Republican Rep. John Moolenaar and Democrat Rep. Raja Krishnamoorthi, who lead the House Select Committee on China, requested a Commerce Department investigation to look into “the threat posed by routers (small office/home office affiliates China) – especially those offered by the world’s largest manufacturer, TP-Link.”

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

Earlier this week, the US House also passed the ROUTERS Act, bipartisan legislation “to protect Americans’ communications networks from technology controlled by foreign adversaries – including Communist China.”

Wi-Fi 7 and 5G upgrade cycles

The Wi-Fi 7 upgrade cycle was one of the catalysts Chalfin mentioned in his original letter, and he reiterated the point once again, noting that the new standard is starting to gain real traction — just days ago, Apple (NASDAQ : ) announced that the latest iPhone line will support Wi-Fi 7.

The earlier-than-anticipated launch of 5G product lines is another potential catalyst.

Share repurchases

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 shares.

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

What do analysts think?

Raymond James analysts also reacted quickly to the TP-Link update.

The news cheered 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 being scaled/improved and can amplify capital return potential.”

“We are thinking NETGEAR has notable catalysts (including TP-Link-related actions), but we remain more conservative in that we do not have this near-term guidance increase in our expectations for 2008,” they continued.

Where is NTGR stock headed?

Raymond James analysts raised their price target to $22 from $17, “given the cash inflow from the TP-Link settlement, providing optionality for growth/cash generation/shareholder returns to support a higher valuation today” .

When Marc Chalfin revealed his stake in May 2024, NTGR was trading below $14. As the stock nears $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 $100 million in annual EBITDA over the next few years, up to $140 million to $150 million if the political tailwinds fully materialize. At that point, he sees the stock business as worth as much as $800 million – $1 billion, or about $40/share, excluding cash and the effect of any potential share buybacks.