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Why Netgear Shares Got Disconnected

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Netgear (NASDAQ: NTGR  ) are off by about 10% this afternoon after two negative reports sent traders scurrying for the exits. The most critical of these reports was one released this morning that claimed that bugs in today's networking technology open millions of users to hacker strikes.

So what: According to a white paper released by security software maker Rapid7, up to 50 million networking devices running the universal plug and play -- or UPnP -- standard could be vulnerable. Netgear is the public company most focused on making these devices, but Cisco's (NASDAQ: CSCO  ) Linksys division was also singled out, as was privately held Belkin and Taiwan's D-Link. The flaws could allow hackers access to files and passwords, or could even lead to a complete hijacking of any connected device, which includes webcams, printers, and security systems as well as PCs. H.D. Moore, Rapid7's chief technology officer, called it "the most pervasive bug I've ever seen."

As more and more devices are hooked up to the Internet, the networking gear that makes it work has become more critical, but has not been made particularly secure. The catch-22 of this situation is that hackers had not made much use of UPnP bugs to date, but now that this information is publicized, they're more likely to investigate and take advantage of the security flaws.

Now what: Software patches are possible, but they may take time. However, this does not seem like a situation that justifies its current panic, and Netgear is currently trading at a reasonable 15.3 P/E. Consumers aren't likely to run screaming into the night, and a proper response would do much to reassure the market that Netgear is going to stay on top of the problem. Hopefully that response will come soon.

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Read/Post Comments (2) | Recommend This Article (1)

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  • Report this Comment On January 30, 2013, at 4:39 AM, IrishHammo wrote:

    I'm buying Netgear. The biggest issue with this expoit is with equipment that is old, the manufacturer has gone out of business and there is no patch available.

    Guess what people will do in that case? That's right, buy new equipment, i.e. Netgear equipment

  • Report this Comment On January 30, 2013, at 10:33 AM, InvestorXYZ wrote:

    NTGR crashed because of the poor acquisition. The article you reference most likely has very little to do with it. They paid a 70% premium (my estimates) for a business with not growth and lower gross margins, then called it accretive and wouldn't quantify the financials in their call.

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