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Why Netgear Stock Plunged Today

By Steve Symington - Apr 25, 2019 at 4:18PM

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Weak guidance eclipsed the networking hardware company's solid start to the year.

What happened

Shares of Netgear (NTGR 0.16%) were down 14.6% as of 3:30 p.m. EDT Thursday after the networking hardware specialist announced solid first-quarter 2019 results, but followed with disappointing guidance.

On the former, Netgear's quarterly revenue climbed a modest 1.6% year over year to $249.1 million, near the high end of its guidance provided in February for a range of $235 million to $250 million. That translated to adjusted net income from continuing operations of $0.60 per share, up from $0.26 in the same year-ago period.

White Netgear Orbi Wi-Fi mesh device on a computer desk

Image source: Netgear.

So what

CEO Patrick Lo credited the company's Orbi WiFi mesh systems and Nighthawk Gaming products for its relative outperformance, adding that the number of registered users for Netgear's paid subscription services also reached 10.4 million during the quarter.

Lo also noted Netgear is poised to roll out its fourth WiFi 6 router next month, and plans to drive "early adoption of these products just as new and much-anticipated WiFi 6 enabled smartphones and laptops are hitting the market."

Now what

But that effort to establish early WiFi 6 market leadership will come at a cost, particularly as Netgear ramps up related marketing investments in the second quarter.

As such, and with continued declines in shipments to service-provider customers, Netgear is targeting second-quarter 2019 revenue of $215 million to $230 million, the upper end of which stands around $26 million below Wall Street's consensus estimate. Netgear also sees adjusted operating margin contracting from 9.1% in the first quarter to a range of 4% to 5% in Q2.

To be fair, Netgear says operating margin should "significantly improve" as both service-provider revenue and marketing spending normalizes in the second half of 2019. But until it shows more tangible progress to that end, I suspect its stock will remain under pressure.

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