Buy This Cheap Stock to Ride the Smart Home Revolution

Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

"The Internet has done so much to change the way we live, work, learn and play that it’s sometimes easy to assume the online revolution is over. But I believe we're only halfway through a 30-year process of profound transformation." - Patrick Lo, Chairman, CEO, and co-founder of Netgear

So begins an intriguing guest post written by Patrick Lo for Forbes last December, in which he briefly describes Netgear's (NASDAQ: NTGR) technology-driven vision for the future.  Mr. Lo goes on to remind us what life was like when he co-founded Netgear in 1996.  Back then, he recalls, we lived without WiFi or smart phones, DVDs didn't exist, and Google was a yet-to-be-named student project at Stanford University.  We also relied on expensive, mind-numbingly slow computers to connect to dial-up Internet connections.  

In addition, there were only 36 million Internet users in 1996, compared to nearly 2.3 billion by the end of 2011 -- or nearly one third of the world's 7 billion people.  While this may sound impressive, remember it leaves 4.6 billion people on the planet who remain unconnected.  Like it or not, as the world continues to move forward, we will become increasingly reliant on the conveniences offered by Internet-enabled technology. 

The Stock

This, my fellow Foolish investors, is where Netgear comes into play.  As North America's leading retail provider of home networking products, Netgear's relatively small size is often overshadowed by its huge brand presence and massive number of sales channels.

Before we dig further, let's look at some of Netgear's key metrics next to a few of its peers:

  Netgear Cisco (NASDAQ: CSCO) Arris (NASDAQ: ARRS)  D-Link
 Market Capitalization   $1.3 billion  $243 billion  $1.5 billion  $0.375 billion
 Debt-to-Equity Ratio   0.00  0.32  0.24  3.70
 Current Ratio  3.20  3.50  5.70  1.78
 Current P/E Ratio  13.95  11.88  N/A  15.16
 Estimated Forward P/E Ratio  12.23  8.78  12.11  N/A
 PEG Ratio (5 yr expected)  0.64  1.11  1.64  N/A
 Dividend Yield  0.0%  3.1%  0.0%  6.53%
 Payout Ratio  N/A  23%  N/A  95.5%
 Return on Invested Capital  12.7%  11.9%  -1.8%  5.27%

Why You Should Love It

While Netgear faces considerable competition from the likes of Taiwan-based D-Link and the Linksys division of Cisco, the company is still mopping the floor with its peers in the retail space.  After all, D-Link and Netgear boasted nearly identical market capitalizations a mere five years ago.  Now, according to Mr. Lo during Netgear's Q3 conference call, Netgear has "nearly doubled the market share of the #2 player in North America."

Netgear also sports an incredible balance sheet with $369 million in cash and equivalents, no debt, and an enviable current ratio of 3.2.  In addition, its shares trade at a reasonable 13.95 times trailing earnings, and just over 12 times next year's estimates.  In addition, while Netgear doesn't pay a dividend, investors should be pleased with its respectable ROIC of 12.7%, which shows its ability to create value for shareholders by reinvesting in its business.

Perhaps most compelling, however, are analysts' long-term revenue growth estimates for the company of over 18%. This gives Netgear a PEG ratio of 0.64, suggesting it's greatly undervalued relative to its growth prospects.  Analysts' estimates, however, could prove conservative as the company continues to stress its stated goal of increasing revenues to $2 billion in 2014 -- an increase of 58% over the next two years alone.  

Why the Housing Recovery Matters to Netgear

Since its inception, Netgear has focused much of its efforts on making easy-to-use networking products for home users.  That focus certainly remains intact as the phrase "Smart Home" was used eight times during last quarter's earnings conference call.  In keeping with Mr. Lo's long-term vision, Netgear's strategy for meeting its $2 billion revenue goal for 2014 hinges on its ability to create new products customers will actually want to use to make their homes "smarter."  

With housing on the mend, you can bet Netgear will be first in line to help new households set up wireless networks, digital media devices, video networks, and network-enabled storage products.

What Now?

Netgear's most recent quarter showed anemic year-over-year revenue growth of 4.4%, primarily the result of the "difficult economic climate" in Europe and Australia.  That said, its great balance sheet and steady operations afford Netgear the ability to continue pushing innovation through smart acquisitions and investments in R&D.  

In the end, Netgear is a steady performer and continues to actively position itself for long-term success.  Shares of NTGR at current levels, then, offer a perfect entry point for patient investors who are willing to wait for the company's growth catalysts to materialize.


Steve Symington has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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