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On May 30, 2014, Zacks Investment Research downgraded Novatel Wireless Inc. , provider of wireless broadband access solutions for the global mobile communications market, by a notch to Zacks Rank #4 (Sell).

Why the Downgrade?

The Zacks Consensus Estimates have been trending downwards, following the company’s dismal first-quarter 2014 performance reported on May 7, 2014. Total revenue in the reported quarter stood at $48.3 million, down 77.8% year over year and also below the Zacks Consensus Estimate of $52 million. However, adjusted loss per share of 22 cents was in line with the Zacks Consensus Estimate.

Following the downward revision, the Zack Consensus Estimate of loss for the current year has widened to a loss per share of 63 cents from a loss of 51 cents in the past 30 days. For the second quarter as well, loss estimate has gone up to 19 cents from 16 cents. Novatel has registered negative earnings surprises in two of the last four quarters, with an average miss of 5.4%. Additionally, Novatel’s shares have fallen 7.2% in the past one month.

Intensifying competition for embedded modules is a major concern for Novatel. In addition to its traditional rival – Sierra Wireless, the company is facing significant challenges from newly launched products by large manufacturers like Qualcomm (QCOM - Analyst Report) and L.M. Ericsson (ERIC - Analyst Report). Qualcomm offers the Gobi chipset that combines broadband modem technology for high-speed 3G networks with GPS functionality.

Going ahead, we anticipate increasing competition for Novatel’s MiFi product line. Several latest versions of smart phones have inbuilt WiFi capability. Low-cost Asian manufacturers, including ZTE and Huawei Technologies, have already launched their own version of intelligent mobile hot spots creating competitive pressure on Novatel.

For the second quarter of 2014, management expects revenues within $37–$43 million while Mobile Computing and M2M revenues are estimated in the range of $27–$32 million and $10–$11 million, respectively. Non-GAAP gross margin is projected between 21% and 23%. Non-GAAP earnings per share are anticipated in the band of a loss of 15 to 22 cents a share.

Other Stocks to Consider

Other stocks worth considering in the wireless equipment industry include InterDigital, Inc. (IDCC - Snapshot Report), Juniper Networks, Inc. (JNPR - Analyst Report) and Ubiquiti Networks, Inc. (UBNT - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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