To be sure, Netgear (NASDAQ:NTGR) shareholders have had it rough so far in 2013.
Back in February, the stock plummeted by as much as 12% after the networking specialist surprised investors by missing expectations for both revenue and earnings per share, after a shift in business to the Americas unexpectedly increased the company's tax rate.
Then, in April, Netgear set a fresh 52-week low after turning in another painful quarter, during which it not only ran into trouble securing components for its new line of ReadyNAS network storage products, but also struggled with delays related to last-minute bug fixes for the products. As a result, the company's first quarter net revenue actually fell 9.9% year over year, while non-GAAP net income dropped a gut-wrenching 31.5%.
But, while shares of Netgear have rebounded more than 18% since then -- including a 6% pop last Friday after Wedbush analyst Rohit Chopra upgraded the stock to outperform from neutral -- I've decided to add shares of Netgear to my personal portfolio over the next few weeks as our trading rules permit. Here's why:
This 'ac' heats things up
First, let's take a look at Chopra's upgrade last week to get an idea of where he's coming from.
In explaining his change of heart, Chopra cited both Netgear's current valuation as well as other catalysts for the remainder of 2013, including "802.11ac retail momentum, new commercial product releases, and reduced service provider earnings dependence."
Even so, it's no coincidence the upgrade came just two days after the global Wi-Fi Alliance officially began certifying 802.11ac devices last Wednesday, with the first round of approvals comprised of just 19 products, including Samsung's Galaxy S4 smartphone and Note 2 tablet, as well as routers from Cisco (NASDAQ:CSCO) and -- you guessed it -- Netgear.
For their part, 802.11ac products support transfer speeds of up to 1.3 Gigabits per second, or more than double the maximum speed of their 802.11n predecessors. What's more, while 802.11ac technology has already been around for more than a year, Chopra also noted the new standard's official certification should serve to drive a significant number of retail router purchases in the space as it did with 802.11n way back in 2009.
Finally, Chopra believes demand for Netgear's new products should increase with the release of next-gen Apple devices this fall, pointing out that, when the first iPad was released in May, 2010, Netgear saw an average eight-quarter retail revenue growth rate of around 23%.
A Fool's take
While I agree with Chopra's assertions that both 802.11ac certification and Apple's next round of iGoodies should definitely help Netgear in achieving its goal of growing revenue by more than 50% to $2 billion by the end of 2014, it's important to remember that these aren't the only things that should have investors clamoring to own its shares.
For example, Netgear only recently finalized its acquisition of the AirCard division of Sierra Wireless in April. At that time, investors were told that the company was already busy responding to multiple requests for proposals from service providers, who were absolutely aching for better options for fixed and mobile LTE solutions. As I pointed out in February, Netgear CEO Patrick Lo has also stated that he expects this new 4G LTE connected device market to grow from less than $100 million last year to more than $1.5 billion by 2017.
What's more, while the folks at the $129-billion behemoth that is Cisco have already largely spread their influence in every significant market across the globe, the comparatively tiny Netgear is only just beginning to expand its presence in fast-growing markets like China, India, and Russia through newly introduced products created specifically to target the expanding number of middle-class consumers in those regions.
We should also note that Netgear's management assured investors last quarter that they're back "in full swing" after their recent challenges, and the company did manage to stay profitable all the while despite its missteps. Better yet, at the end of last quarter, Netgear boasted no debt and $422.4 million in cash on its balance sheet, good for roughtly one third of its entire $1.3 billion market cap.
Remember, however, Netgear's cash balance will be reduced in the current quarter by the payment of the AirCard acquisition, which amounts to roughly $140 million.
Even so, shares of Netgear currently look like a bargain, as they trade for just 16.4 times last year's earnings, and only 11.1 times next year's estimates. Incidentally, that's even lower than Cisco's already-low forward P/E of 11.5 -- not too shabby for a small growth company whose market cap is around one hundred times the size of its mammoth competition.
Better yet, if you back out Netgear's cash after the cost of the AirCard payment, its trailing and forward earnings multiples drop to just 12.6 and 8.6, respectively. Assuming Netgear can deliver on its promise for earnings and revenue growth going forward, I'm convinced this stock is simply far too cheap to pass up.
In the end, that's why I'll soon be adding Netgear to my personal portfolio, and why I believe long-term investors who follow suit will be handsomely rewarded for their patience.