Don’t Miss Out: NETGEAR's Turnaround Signals Big Potential

Key Points

• NETGEAR is a global manufacturer of networking products like routers, switches, and Wi-Fi modems. It has nearly 60% of its market capitalization in cash and no debt.
• Its shares surged over 30% on news of its settlement with TP-Link resulting in a $135 million payout.
• NETGEAR also raised revenue guidance for its third quarter of 2024 as its next-gen 5G mobile hotspot devices will launch a whole quarter ahead of previously expected.

NETGEAR Inc. NASDAQ: NTGR manufactures a wide range of networking products for consumers and businesses worldwide. Its devices, including routers, switches, and modems, help to enhance internet connectivity.

The company has been around since the internet boom. It continues to provide reliable, high-performance networking products that enable seamless connectivity for a growing range of applications ranging from home networking and internet access to business communications and smart home devices. Shares surged more than 30% after winning and settling a patent infringement and breached contracts lawsuit with TP-Link.

The computer and technology sector company competes with Cisco Systems Inc. NASDAQ: CSCO, Juniper Networks Inc. NYSE: JNPR and Ubiquiti Inc. NYSE: UI,

Resolving the TP-Link Dispute

In April 2023, NETGEAR complained to the U.S. International Trade Commission (ITC), claiming that Singapore-based TP-Link infringed on its patents related to multi-band Wi-Fi technology. The ITC ruled in favor of NETGEAR in May 2024, concluding that TP-Link infringed on its patents. To avoid having an import ban placed on its products, the company went ahead and settled with NETGEAR to the tune of a $135 million payment and new licensing terms on Aug. 28, 2024. NETGEAR announced this news on Sept. 12, 2024, causing shares to surge 31%.

The settlement will result in $90 million cash after paying fees and taxes. More importantly, there won’t be any more costly litigation expenses to contend with, which frees up cash flow and removes the litigation cloud.

Launching Its Next-Gen 5G Mobile Hotspot

NETGEAR also announced an earlier-than-anticipated launch of its next-gen 5G mobile hotspot device, which is expected to roll out in the third quarter of 2024 instead of the fourth quarter. It’s the Nighthawk M7 Pro Mobile Hotspot Device, which is the world’s first Wi-Fi 7 5G mobile hotspot. It combines the benefits of Wi-Fi and 5G for lower latency, better coverage, and faster speeds. The M7 Pros provides 5G speeds up to 6 Gbps. It debuts at AT&T Inc. NYSE: T.

NETGEAR Bites the Bullet on Inventory Glut

NETGEAR has been in a slump prior to the settlement. The company’s stock has been selling off since peaking at $46.38 on Jan. 25, 2021. Like most manufacturers, the company has been impacted by high interest rates, inflation, and weak consumer spending. The inventory glut has prevented the company from meaningful YoY growth. Rather than slowly destock excess inventory throughout the year, NETGEAR decided to bite the bullet and accelerated it through Q2 2024, which resulted in a 17% YoY drop in revenue plunge to $143.9 million, still beating $132.54 million consensus estimates. Q2 2024 EPS loss of 74 cents still beat consensus estimates. It gave in-line revenue forecasts for Q3 2024 of $160 million to $175 million versus $172.23 million consensus estimates.

Its destocking actions managed to lower inventory levels significantly. While it hurt Q2 2024 earnings, it placed the company in a better position to stage a turnaround. The company was able to exit Q2 with $300 million in cash, and subscriber growth is still robust at 19% YoY to 958,000; the company is staging a turnaround that was accelerated by the settlement announcement. NETGEAR raised its Q3 2024 revenue guidance higher to $170 million to $180 million, up from earlier guidance of $160 million to $175 million. This contributed to the surging stock price. However, to keep things in perspective, the raised revenue guidance still amounts to an 11% YoY revenue decline, marking the 12^th consecutive quarter of negative growth.

NETGEAR Triggers an Ascending Triangle Breakout

An ascending triangle is formed by a flat-top upper trendline resistance converging with an ascending lower trendline that connects higher lows on pullbacks. A breakout triggers when the stock surges through the upper trendline resistance.

NETGEAR triggered the ascending triangle breakout on news of the settlement and raised Q3 2024 guidance. NETGEAR gapped from $15.97 to $19.62, forming the gap fill levels. Shares managed to surge even higher up to $22.62 after that, bringing total 2-day gains to nearly 37%, reaching levels it hadn't seen since September 2022. The daily relative strength index (RSI) surged to the $81-band. Fibonacci (Fib) pullback support levels are at $18.42, $17.21, $15.49, and $14.47.

NTGR’s average consensus price target is $15.00, and its highest analyst price target sits at $17.00.  

Maximize Income With NETGEAR: Covered Calls and Wheel Strategy

While the sentiment and stock price exploded on the settlement and raised guidance, the stock may have gotten ahead of itself, surging above its consensus price target of $15.00 and highest analyst target of $17.00. Analysts may upgrade their targets after the settlement since there are only two covering the stock. After the settlement, the company will have around $384 million in cash with no debt, which is nearly 60% of its current market cap, which could trigger boosted targets.

Bullish investors seeking entry into this stock are best served using cash-secured puts at the fib pullback support/gap fill levels to buy on the dip and write covered calls to execute a wheel strategy for income.

A Poor Man’s Covered Call (PWCC) strategy is less capital intensive on this speculation, which involves buying a deep in-the-money (ITM) back-month call and selling out-of-the-money (OTM) front-month calls.