A company called NETGEAR Inc (NASDAQ:NTGR) may not instantly ring a bell, but one is almost certain to have used their products.
The maker of networking equipment of all shapes and forms, NetGear has been a major supplier of Wi-Fi routers and wireless access points for as long as the technology has existed.
Nasdaq-listed since 2003, the once thriving company recently saw its shares hit lows not seen in over 10 years, as it continued to battle long-lasting disruptions from the pandemic.
But the worst may be behind, according to at least one activist investor. And the future may prove brighter than ever.
Pandemic Troubles
The COVID-19 pandemic left few stones unturned and NetGear was no exception.
The company, which outsources manufacturing to Asia, found itself dealing with the classic and perhaps biggest pandemic woe of 2022 – the supply chain disruptions.
Under the leadership of former CEO Patrick Lo, NTGR did what appeared reasonable at the time – stocked up on inventories, out of uncertainty over future shipments.
Hindsight is always 20/20, but what looked like a prudent decision in the middle of COVID, has been haunting NetGear ever since – the challenging economic backdrop that followed made it problematic to offload the bloated pile-up, dragging down every key financial metric with it.
The struggle went on for over 6 quarters until new CEO, Charles “CJ” Prober, installed in January of this year, decided to “rip the band-aid off” and “developed a plan to expedite the remaining destocking in Q2.” Prober admitted that the decision “creates a near-term challenge,” and would result in a bleak Q2 readout.
Some investors have clearly had enough – shares tumbled over 20% that day.
Other market players, however, saw an opportunity.
Activist Supports Radical Measures
Marc Chalfin, CIO of Windward, a Florida-based activist fund that targets “significantly skewed and asymmetric risk/rewards,” recently issued a letter to NTGR’s management, outlining ways to create just that – a very upwardly skewed risk/reward situation.
Chalfin said he owns a 4.2% stake in the company, making Windward the 5th largest shareholder. His arguments are simple – even without any drastic changes, NetGear is a business that has generally been EBITDA-positive ($60M-$150M annually) for nearly 20 years.
At current price levels NTGR trades at values close to its cash on hand – Chalfin sees the company’s cash pile grow to ~$350M by end of year, very close to current market cap of around $390M – implying nearly zero value for its businesses.
With inventories clearing up, market normalizing and several important tailwinds underway – the business should do well even as is. It would definitely be worth more than zero.
But a few fairly straightforward actions may turn NTGR into a true force to reckon with.
Expanded Share Buyback
In his letter, Chalfin points out that NTGR only has 1.7M shares left authorized for buyback. At current price levels, that implies a cash value of around $20M.
The company has nearly $290M of cash on hand, guided meaningful Free Cash Flow generation throughout 2024, and by its own admission only needs about $125M to maintain the business operations.
In exclusive comments made to Investing.com, Marc Chalfin reiterated his estimate that NTGR may very well exit 2024 with over $350M in cash – or over $225M more than it needs to run the business.
For Chalfin, the situation is a no-brainer – the company needs to massively expand its share buyback, especially at current price levels where the excess cash allows to “shrink your equity for close to free.”
Chalfin pushes for a middle-of-the-road $100M figure – leaving the company with plenty of cash while noticeably benefiting the shareholders.
During our conversation, Windward’s head also noted that NTGR has done $100M-$150M buybacks in the past, hence, his request is nothing out of ordinary.
Separation of Best-performing Business Segment
NetGear as a whole may not be the hottest business with the strongest numbers, but one of its parts is.
NETGEAR for Business or “NFB” is the company’s star child and “has consistently posted contribution margins of 20% with double-digit revenue growth, prior to last year’s destocking anomaly and supply chain issues.”
Chalfin argues that NFB is a strong business and would be valued as such, were it to be decoupled from “the more cyclical, more competitive Connected Home segment.”
He is pushing to establish a strategic review committee and potentially spin off the fast grower from the core business.
Last but not least, his letter highlights NetGear’s Pro A/V line, “a gem buried within NFB, would be of significant interest to a potential acquiror.”
Perfect Storm of Tailwinds
A solid business trading for cash, with ways of immediate value creation – for Chalfin, there’s already a lot to like about NetGear. But there’s more.
During the conversation with Investing.com, Marc pointed out another development that the market seemingly assigns no value to – after years of headwinds and misfortunes, NTGR may be set for a perfect storm of macro tailwinds. He points out two obvious ones:
- Product Upgrade to WiFi 7. WiFi 7 is the latest wireless standard, officially released in January of this year. Clients, big and small, are still in the early stages of the upgrade cycle, which should greatly accelerate in the second half of the year, according to Windward’s own industry checks.
- ROUTERS Act. A bipartisan bill in the US Congress expected to ban the use of Chinese-made wireless equipment. Windward’s team estimates the resulting decrease in competition may add “at least $200M in revenue for NetGear.”
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