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Why Quantenna Communications, Inc. Stock Fell 35% Today

By Anders Bylund - Nov 7, 2017 at 2:17PM

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The maker of premium Wi-Fi chips for service providers and enterprise networks issued weak fourth-quarter guidance, but the underlying challenge is going away soon. Time to buy?

What happened

Shares of Quantenna Communications ( QTNA ) plunged as much as 35.4% lower Tuesday morning, following the release of solid third-quarter results with a side of gloomy next-quarter guidance. As of 12:25 p.m. EST, the wireless networking specialist's stock was still trading 34.4% below Monday's closing prices.

So what

Quantenna's preliminary release showed third-quarter sales rising 47% year over year to land at $50.1 million, ahead of the Street's $49.9 million consensus estimate. On the bottom line, adjusted earnings more than tripled to $0.14 per diluted share. Here, analysts would have settled for $0.08 per share.

Looking ahead, Comcast ( CMCSA -1.80% ) has delayed its rollout of next-generation Quantenna chips supporting wireless speeds of 10 gigabits per second, which triggered soft guidance for the next quarter. Fourth-quarter sales are now seen stopping near $41 million, and Quantenna should report an adjusted net loss of roughly $0.03 per share next quarter. That would compare to an adjusted $0.03 profit per share on sales of $37.5 million in the year-ago period. Analysts are currently looking for fourth-quarter earnings of approximately $0.09 per share on sales near $53.3 million.

A person watches a red charting arrow crashing through a stone floor suspended in air.

Image source: Getty Images.

Now what

Quantenna CEO Sam Heidari assured analysts and investors that these challenges are typical for the early stages of a new product introduction and should be temporary in nature. In fact, the company has secured firm orders for future delivery and Heidari is certain that his company isn't losing sales to the competition in this large cable contract.

It's not unusual to see investors focusing on short-term challenges despite the presence of solid long-term business prospects, but the sheer intensity of Tuesday's price drop seems unmotivated. The stock has not been soaring to nosebleed heights in 2017 and trades at a not-too-crazy 36 times trailing earnings right now. The overarching worry is that Quantenna might lose a step as the market for 10G wireless networks develops, giving rivals a chance to step in and steal market share.

Those fears seem overdone, as there's plenty of room for several strong contenders in the premium Wi-Fi chip market. Smart investors should pounce on Quantenna here at the young stock's all-time lows.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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