Netgear Jumps in Trading Debut

Because of harsh competition from the likes of Linksys, Microsoft(MSFT Quote) (a newcomer but formidable rival in Wi-Fi) and D-Link, Netgear faces serious pricing pressure in its core markets. And therein lies the biggest worry for investors: Netgear's profits could suffer as the price of networking equipment keeps plunging.

Netgear has posted losses for three of the past four reported years, though more recently it has moved into the black, reporting profits for four quarters running. In 2002, the company slipped to a loss of $9.7 million on sales of $273 million, after shelling out a $17.9 million dividend for preferred stockholders. Without the dividend, it would have seen an $8.1 million profit.

To the company's credit, Netgear has done a smart job of wangling concessions from its suppliers. In other words, its own costs have dropped at about the same pace as the price of the goods it sells. The company has even managed to expand its gross margins over the past few years, from 17.6% in 2000 to 25.4% in 2002.

But there's unanimous agreement that commoditization pressure in WLAN -- the hottest part of Netgear's business -- is a huge challenge for all the players in the business. Indeed, just this month, investors cheered when chipmaker Intersil(ISIL Quote) announced it was selling off its Wi-Fi business to concentrate on more profitable analog silicon.

Prices in two of Netgear's markets, WLAN access points and network interface cards, are expected to plummet over the next few years. Average selling prices of wireless LAN access points are likely to fall at an annual rate of 8% a year between 2000 and 2008, according to estimates by Allied Business Intelligence Research.

Meanwhile, the cost of NICs (for 802.11b, the most popular current flavor of Wi-Fi) are expected to decline from their current price of just under $50 to less than $35 in another year or two, reckons Aaron Vance of Synergy Research. As recently as a year ago, the cards retailed for around $100.