Why Netgear, Inc. Stock Tumbled Today

Is Netgear's drop meaningful? Or just another movement?

Jul 25, 2014 at 4:05PM

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) dropped more than 11% in Friday's trading after the networking equipment specialist reported mixed second-quarter results and disappointing forward-margin guidance.

So what: Quarterly revenue fell 5.6% year over year, to $337.6 million -- or the low end of Netgear's own guidance -- which translated to a 6.5% drop in adjusted net income per diluted share, to $0.58. Analysts, on average, were only expecting adjusted earnings of $0.55 per share, but on higher sales of $344.3 million.

However, Netgear expects current-quarter revenue in the range of $345 million to $360 million, which is well below analysts' expectations for third-quarter sales of roughly $366 million.

Now what: Netgear CEO Patrick Lo explained that the second-quarter shortfall came primarily as the result of continued weakness in Europe. At the same time, Lo insisted, "We are taking proactive measures to address this by realigning the Northern European [Retail Business Unit] and Commercial Business Unit] sales channels." Over the long term, this should aid Netgear in achieving its goals of taking market share, and improving profitability in the region.

I've made no secret of my fondness for this solidly profitable small-cap stock. After all, as Internet-connected devices only continue to become more ubiquitous, Netgear's solid long-term growth prospects only become all that much more clear. And continued weakness in Europe, while not ideal, is hardly indicative of a broader problem with Netgear's business. As a result, I still plan on holding tight to my own shares of Netgear for the foreseeable future.

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Steve Symington owns shares of Netgear. The Motley Fool recommends Netgear. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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