We reaffirm our long-term Underperform recommendation on Novatel Wireless Inc. (NVTL). Management provided a devastating financial outlook for the ensuing first quarter of 2011. Novatel cited lower sales of its 3G products and ongoing customer transition to next-generation 4G products are the primary reasons for this pathetic guidance. The recent trend of the 3G USB modem industry is indicating a glut of inventory on the part of the wireless carriers. Several industry sources predicted that Verizon Wireless (VZ), an important customer of Novatel for its MiFi intelligent hotspot, may generate lukewarm demand in the ensuing quarter, attributable to its huge modem inventory.
A Bloomberg report forecasted that Verizon will soon start selling Apple Inc.’s (AAPL) iPad with internal connectivity for its high-speed 3G networks. The company will provide an embedded chip within iPad through which the users will be able to connect its 3G networks without requiring MiFi. The report was quite surprising, as Verizon has just started selling MiFi-installed iPads and, within four months, it again declared plans to introduce 4G MiFi devices soon.
If this report comes true, it will be a serious concern for Novatel. MiFi currently constitutes more than 48% of Novatel’s total revenue. Loss of a big customer like Verizon will definitely affect the company. Nevertheless, Verizon did not specify any date from when it will start selling its embedded iPads.
We anticipate an increasing competition for Novatel’s MiFi product line. Several latest versions of smart phones are having WiFi capability inbuilt, eliminating the need for a separate modem like MiFi. Low-cost Asian manufacturers such as ZTE (ZTCOF.PK) and Huawei Technologies have already launched their own version of intelligent mobile hot spots, forcing competitive pressure on Novatel.
We do not find any immediate catalyst for Novatel and expect the company to remain loss-making in 2011. Currently, Novatel holds a short-term Zacks #4 (Sell) Rank on the stock.