Why Netgear Inc. Stock Plunged Today

By Markets Fool.com

Image source: Netgear, Inc.

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What happened

Shares of Netgear Inc. (NASDAQ: NTGR) fell as much as 11.1% early Thursday, and traded down 8.8% as of 11:30 a.m. EDT after the network hardware specialist released stronger-than-expected third-quarter 2016 results, but followed with slightly lower-than-expected revenue guidance for the current quarter.

So what

Quarterly revenue declined 1% year over year, to $338.5 million, and translated to 19.4% growth in adjusted net income, to $25.9 million. Adjusted net income per share also grew 13.4%, to $0.76, while adjusted operating margin improved 120 basis points year over year, to 11.5%.

More specifically, Netgear's retail business unit delivered 18.4% growth in revenue, to $194.2 million, and its commercial segment increased revenue 12.6%, to $73.4 million. On the service provider side, however, revenue declined 37.1% year over year, to $70.8 million. Netgear took steps last year to restructure its service provider business, bringingcosts in line with a transition by providers involving reducing wireline investments while continuing to invest in wireless infrastructure.

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By comparison, Netgear's guidance called for lower revenue in the range of $315 million to $330 million, and adjusted operating margin of 10.5% to 11.5%. And analysts, on average, were looking for lower adjusted earnings of $0.71 per share.

"The outperformance during the quarter was led by our Nighthawk routers, cable gateways, Arlo cameras and 10 Gig switches," said Netgear CEO Patrick Lo. "Overall, our financial results reinforce that the company remains on a strong trajectory."

On a geographic basis, Netgear also saw continued strength during the North American back-to-school season, and solid growth from last year's third quarter in the Asia-Pacific region. Meanwhile, the EMEA region remained challenging, as expected.

Now what

For the current quarter, Netgear anticipates revenue in the range of $340 million to $355 million, the midpoint of which is slightly below the $349.7 million Wall Street was modeling. Similar to last quarter's beat, Netgear says this guidance accounts for normal seasonality (this time with the holidays instead of back-to-school shopping), but also a reduced service provider revenue forecast.

Even so, the relative strength of Netgear's core retail business is evident in Thursday's results. And I think the market is ignoring the very likely possibility that Netgear is once again under-promising with the intention of over-delivering when it reports fourth-quarter results three months from now. As such, I think Thursday's drop offers a compelling buying opportunity for patient, long-term Netgear investors.

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Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Netgear. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.