Novatel: Recent Sell-Off May Present Buying Opportunity

| About: Inseego Corp. (INSG)

On Tuesday, Bell Mobility announced that it was recalling all of Novatel Wireless Inc.’s (NVTL) new MiFi 2372 devices due to a battery malfunction problem. Since Novatel’s MiFi device represents its largest opportunity, investors reacted poorly to the news. On the day, NVTL’s shares declined 10.4% to $6.15. Later in the day, NVTL issued a statement about the recall on its website:

Novatel Wireless’ top priorities are to serve our customers and end-consumers and to provide for the safe use of our products. There have been two incidents of battery overheating issues reported from Bell and Virgin Mobile Canada. While we can't comment on specific consumer incidents, it has been reported that some customers have had difficulties opening the battery door, thus utilizing sharp objects or excessive force to open it. While doing this, customers can inadvertently puncture the battery when trying to remove it and this can cause the battery to overheat. To reduce the probability of user-induced damage to the battery, we have redesigned the battery door to make it easier to open.

Any product or battery issue is considered a matter of utmost importance for Novatel Wireless. As a preventive measure, the Company is conducting an exchange program for Bell and Virgin Mobile Canada customers to replace the MiFi 2372 battery and battery door. As a proactive measure, we have been shipping all new MiFi 2352 units with the new battery door.

The MiFi 2200 -- addressing the CDMA market -- represents the vast majority of the MiFi units sold to date. The MiFi 2200 has different design features and components; hence, it is not affected.

According to the Company’s statement, (1) the MiFi recall was not related to its key MiFi 2200 product, which account for the vast majority of MiFi sales, and (2) the MiFi 2200 product has different design features and components. Thus, we do not believe the recall is material to operations. In addition, we believe the risk of the MiFi 2200 also being re-called is limited. As a result, we believe the 10% sell-off may have been overdone and could present a significant buying opportunity.

As of Q4 09, the Company had $5.56 in cash and investments on its balance sheet and zero debt. At its current price, the market is only assigning $0.59 to the value of the business. Novatel reports Q1 10 Earnings on Thursday, May 6th, after the market closes. Analysts are expecting Q1 revenue and a non-GAAP loss of $70.5 million and $0.12. At its current valuation, we believe the risk-to-reward opportunity is compelling.

Disclosure: The author is long NVTL