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Why Netgear, Inc. Stock Plunged Today

By Steve Symington - Feb 7, 2018 at 4:35PM

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Conservative guidance and a planned spinoff overshadowed another strong quarter from the networking leader.

What happened

Shares of Netgear Inc. (NTGR -0.72%) were down 13.9% as of 3:30 p.m. EST Wednesday after the networking hardware specialist announced better-than-expected fourth-quarter 2017 results, but followed with light first-quarter 2018 guidance. Netgear also announced the planned separation of its burgeoning Arlo wireless security camera business.

Netgear Arlo security cameras and router against a white background.

Image source: Netgear.

So what

More specifically, Netgear's fourth-quarter revenue climbed 7.9% year over year to $397.1 million, which was well above the high end of guidance provided last quarter for a range of $375 million to $390 million. On the bottom line, that translated to adjusted earnings of $0.71 per share, down from $0.88 in the same year-ago period, but comfortably ahead of investors' expectations for $0.64 per share.

Netgear Chairman and CEO Patrick Lo noted that demand during the holiday season was stronger than expected, calling their Arlo and Orbi lines "massive hits with consumers."

"We could not have asked for a better finish to 2017," Lo added. "Meanwhile, we recently expanded our Nighthawk line into the gaming category, and released several new and exciting products and services for the [small and medium business] segment."

Now what

That said, Netgear also announced its decision to separate Arlo from the rest of the company through an IPO in the second half of 2018. Netgear says Arlo will issue less than 20% of its common stock in that public offering, with Netgear retaining the remaining 80% interest. Following the IPO, Netgear will implement a tax-free distribution of Arlo shares held by Netgear to its stockholders.

"Both businesses are strong enough to operate independently," Lo explained, "and will benefit from the focus, flexibility and financial resources that come with separation."

In the meantime -- and keeping in mind the company has made a habit of under-promising and over-delivering -- Netgear expects first-quarter revenue in the range of $330 million to $345 million. The midpoint of that range stands below consensus estimates for $342.4 million.

Combined with the uncertainty of the separation of Arlo -- which is arguably Netgear's best-performing business segment today -- it's no surprise to see shares pulling back Wednesday. But given Netgear's relative outperformance and the justification for the separation, I think long-term investors should have nothing to fear.

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