We reiterate our long-term Neutral recommendation on Novatel Wireless Inc. as we believe that the stock is currently fairly valued. The company posted mixed financial results for the first quarter of 2013. While the total revenue was ahead of the Zacks Consensus Estimate, quarterly earnings were below the same.
Why Kept at Neutral?
Revenues declined on an annualized basis, which was mainly attributable to subdued performance in the Mobile Computing Product segment. We do not expect Novatel to achieve profit any time soon. Continuous losses may jeopardize its healthy balance sheet, going forward. Moreover, a highly concentrated customer base is another headwind for the company.
Nevertheless, management is hopeful that the company’s 4G MiFi intelligent hotspots and Expedite embedded solution will achieve meaningful market traction, going forward. The company also expects order backlog for its MiFi 2 to remain strong in the second quarter of 2013. Novatel currently has a Zacks Rank #2 (Buy).
Risk/Reward Virtually Balanced
Novatel has launched its innovative touchscreen MiFi 2 product with AT&T Inc. (T - Analyst Report). The company also launched the MiFi 2 with Canada’s largest LTE service provider, Bell Canada. Novatel also plans to launch the next generation Wi-Fi hotspot with Sprint Nextel Corp. (S - Analyst Report) during the second half of 2013. Recently, Verizon Wireless, a subsidiary of Verizon Communications Inc. (VZ - Analyst Report), launched Novatel’s MiFi 4620 with an expanded battery backup. Novatel further introduced a second variant of MiFi called MiFi 5510L with Verizon Wireless in the first quarter of 2013, which is more cost effective.
However, we anticipate a gradual increase in competition for Novatel’s MiFi product line. Several latest versions of smartphones have an inbuilt WiFi capability. Low-cost Asian manufacturers, including ZTE and Huawei Technologies, have already launched their own versions of intelligent mobile hot spots. This is exerting competitive pressure on Novatel. Intensifying competition for embedded modules is also a major concern for the company.