NETGEAR Inc. NTGR stock has rallied 17.5% in the past month, outperforming its sub-industry, and the S&P 500 Composite’s growth of 6.4% and 2.8%, respectively. The stock trajectory received impetus following better-than-expected third-quarter results (announced on Oct.30) and encouraging business outlook.

Prior to that, the stock had been rising owing to guidance revision due to the litigation settlement with TP-Link Systems and the early launch of its next-generation 5G mobile hotspot. Investors cheered the development and stock gained 31% on Sept.12.

One-month Price Performance

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The stock is trading above its 50 and 100-day moving averages, indicating upward momentum and price stability.

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Closing the last session at $24.04, the stock is trading near its 52-week high of $25.39. Investors may question whether this rally leaves room for further upside or if the stock has reached its peak. Let us dive into NTGR’s prospects and determine your portfolio's best course of action.

Momentum in NTGR’s NFB Segment Bodes Well

Strength in the NFB segment bodes well. Revenues from the NFB unit jumped 11.4% year over year and 31.2% sequentially to $78.5 million in the third quarter. Momentum in ProAV managed switch business (especially strong growth in North America and APAC) and efforts to expand the Wi-Fi LAN business remain tailwinds. NTGR also added that the company has increased the number of ProAV manufacturing partners to more than 330 to boost the ease of use and reliability of its ProAV solutions.

Moreover, NETGEAR completed a successful destocking plan across CHP and NFB, leading to a $27 million reduction in inventory in the third quarter. This is expected to help the company to align sell-in with sell-through with channel partners, thereby increasing revenue predictability. Management expects net revenues in the band of $160-$175 million for the current quarter.

NETGEAR also witnessed a 22% spike in recurring services revenues in the quarter under review. It now has 555,000 recurring subscribers. Increasing subscriber revenues is essential for long-term financial stability and cash flow generation.

NTGR remains focused on boosting investment in its NFB business to further stimulate growth and accelerate margin expansion via software differentiation and recurring revenues.

NTGR Launches Innovative Products

The rapid demand for robust networking solutions owing to the growing number of Internet-connected devices and the shift from older WiFi standards to the much-awaited WiFi 7 bodes well for NTGR. WiFi 7 offers speeds 2.4 times faster than WiFi and meets the increasing demands of modern connectivity. NTGR has been strengthening its portfolio of Wi-Fi 7 devices with new product launches.

Apart from the early launch of the next-generation 5G mobile hotspot, the company recently expanded its Nighthawk WiFi 7 standalone router portfolio with the addition of the RS600, RS500 and RS200 routers. The new standalone WiFi 7 routers complement the Nighthawk RS700S and RS300, offering impressive speed, low latency and high capacity, all supported by strong security features. Before that, it launched WBE710 Insight Manageable Tri-band WiFi 7 Access Point solutions. This solution is designed to boost data throughput across multiple bands to lower network congestion. 

NETGEAR intends to maintain a competitive edge with new product launches, which hinge on affordability, reliability and ease of use, for consumer, business and service provider markets.

NTGR’s Transformational Strategic Planning

Management has outlined a three-year plan focusing on long-term growth, operating margin expansion and cash flow generation. The company has been also investing in human capital to deliver stronger products to gain higher market share and drive better financial results and cash flow generation.

Also, the company’s capital allocation plan emphasizes a balanced approach between returning capital to its shareholders and investing in high-potential areas like the NFB business.

NTGR repurchased 99,000 shares worth $1.5 million in the third quarter due to trading restrictions. The company has 3.8 million shares left under existing authorization and expects to resume buyback in the fourth quarter. Improving the cash profile is a plus.

NTGR Faces Headwinds

Weak macroeconomic conditions and increasing costs remain as overhang on the performance. Margins are likely to remain affected by inventory reduction efforts and elevated transportation costs, including the Red Sea shipping crisis.

NETGEAR anticipates increased promotional activity within the retail business for its CHP segment, particularly as the holiday season approaches, which could further eat away at margins. It anticipates revenues from the service provider channel to be nearly $20 million in the fourth quarter, slightly down sequentially, owing to the earlier launch of the M7 Pro mobile hotspot.

How Should Investors Play NTGR Stock?

Strong end-market demand and opportunities presented by the Wi-Fi 7 and 5G upgrade cycles are positives for NTGR but the external risks warrant caution in the near term.

Consequently, it might not be a prudent investment decision to bet on the stock, which carries a Zacks Rank #3 (Hold) at present.

Stocks to Consider

Some better-ranked stocks from the broader technology space are Plexus Corp., Inc. PLXS, Workday Inc. WDAY and InterDigital, Inc. IDCC. IDCC & PLXS presently sport a Zacks Rank #1 (Strong Buy), whereas WDAY carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for PLXS’ fiscal 2025 EPS is pegged at $6.79, unchanged in the past seven days. PLXS’ earnings beat the Zacks Consensus Estimate in three of the trailing four quarters, while missing once, with the average surprise being 10.3%. Its shares have increased 59.4% in the past year.

The Zacks Consensus Estimate for IDCC’s 2024 earnings is pegged at $15.22, up 12.5% in the past seven days. IDCC’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 163.7%. Its shares have surged 94.7% in the past year.

The Zacks Consensus Estimate for WDAY’s fiscal 2025 EPS is pegged at $6.97, unchanged in the past 30 days. WDAY’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 9.3%. The stock has declined 2.9% in the past year.

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