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The Reason Behind Netgear's 30% Stock Increase

By Jason HopeStock MarketsJan 20, 2017 07:22PM ET
www.investing.com/analysis/the-reason-behind-netgear's-30-stock-increase-200173084
The Reason Behind Netgear's 30% Stock Increase
By Jason Hope   |  Jan 20, 2017 07:22PM ET
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NETGEAR Inc (NASDAQ:NTGR), the tech company based out of San Jose, CA, had an impressive fiscal 2016. Exceeding each of its quarterly revenue projections, the American global networking company ended up enjoying a net 30% stock increase for the year. The company markets its products to a variety of consumers, targeting both service providers as well as retail and commercial businesses.

The company's results have certainly made investors happy. But what exactly has been the impetus for their success? According to a company representative, there's been a high level of demand for many of their high-margin products. The market for items like their 10-gig switches, wireless security cameras, and cable gateways is continuing to grow. Although service providers still make up an important part of Netgear's customer base, much of their 2016 success has been due to their retail and commercial clients.

So then, what is the reason for the increase in demand for these types of products? In large part, it's due to a phenomenon known as the Internet of Things (IoT). It refers to the trend towards all kinds of electronic devices to becoming connected with the internet. The world is becoming a smaller place, and consumers are demanding increasing levels of connectivity with each other, as well as their devices.

Even devices that aren't traditionally thought of as being associated with internet connectivity are getting linked up and exchanging data through the internet. Ovens, microwaves, thermostats, and refrigerators are just a few examples. This increased level of connectivity obviously benefits consumers by offering greater convenience and more options. Likewise, it benefits retailers by allowing them to make better, more competitive products for their customers.

One benefit that might be slightly less obvious is the gargantuan increase in data provided to retailers and manufacturers. All major companies try to implement data-based analytics in an effort to optimize their marketing and production efforts. But the rise of the IoT has exponentially increased the availability and value of this information. Now, an oven manufacturer can have instant access telling them what temperature people prefer their potatoes baked at, which days of the week they use ovens the most or least, and which features are least used. They don't have to rely on expensive surveys, which still end up being flawed due to human error/inconsistency. The actual data is transmitted automatically.

While Netgear's 2016 results are promising, it's important to keep things in perspective. Following their last quarterly report in October, the company's stock dropped by 8%. The decline stemmed from the recently restructured service provider branch of their business. Although the most recent dip in their stock may be troubling, there's no reason to overreact. Every company has its ups and downs, but the bottom line is that Netgear's fundamentals are still solid. As long as their leadership continues to account for the IoT movement in their business model, there will continue to be a steady demand for their products in the foreseeable future.

The Reason Behind Netgear's 30% Stock Increase
 
The Reason Behind Netgear's 30% Stock Increase

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