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October 5, 2010
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We upgrade our recommendation to Neutral for Novatel Wireless Inc. (NVTL), which means the stock will perform mostly in line with the broader market. According to our analysis, proper execution of cost structure and expected launch of 4G (LTE) embedded products are likely to benefit the company’s earnings power in future reporting quarters. An extremely strong balance sheet may boost investor’s confidence on management to sustain a challenging economic condition. Furthermore, the stock price has fallen nearly 33% in the last one year and at this stage we do not find further downside potential.
Recently, Novatel has launched an innovative USB modem for Dual-Carrier HSPA+ networks. Ovation MC545 theoretically provides downlink speed of 42 Mbps and uplink speed of 5.7 Mbps and supports the 900, 1900, and 2100 MHz frequency bands offering connectivity anywhere within the operators network. Another advantage of Ovation MC545 is that it is the industry’s smallest dual-carrier HSPA+ modem.
In a major initiative to enrich its pipeline, Novatel has decided to introduce next-generation (4G) enabled devices. These innovative devices will support super-fast network technologies of dual carrier HSPA+, WiMAX, and LTE. Management announced that it has already won a design contract for LTE enabled-product from a Tier 1 manufacturer. All these products are expected to be introduced in late 2010 and may help the company to expend its margins in 2011.
However, intensifying competition for embedded modules is the major concern for Novatel. In addition to its traditional rival, Sierra Wireless Inc. (SWIR), the company is facing significant challenges from newly launched products by large manufacturers, including Qualcomm Inc. (QCOM), and L.M. Ericsson AB (ERIC). Loss of market share in the embedded solutions market resulted in lower ASP that in turn reduced the second quarter 2010 gross margin to 18.9% compared to 22.1% in the year-ago quarter. Novatel forecasted 20% gross margin for the third quarter 2010, well below its traditional 28% range.
We also anticipate gradually increasing competition for Novatel’s MiFi product line. Several latest versions of smartphones are having WiFi capability in-build. Large firms like Qualcomm, ZTE, and Huawei Technologies are on the verge of introducing their own version of intelligent mobile hot spots. In the second quarter 2010, MiFi sales declined by a whopping 26% sequentially.
Read the full analyst report on "NVTL"
Read the full analyst report on "SWIR"
Read the full analyst report on "QCOM"
Read the full analyst report on "ERIC"
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