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Netgear's Outlook May Be Cause for Caution

Netgear shares climbed to a 52-week high on Wednesday after a strong third-quarter report but there's some evidence the stock may be getting ahead of itself.



) -- Shares of


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(NTGR) - Get Report

climbed to a 52-week high on Wednesday after a strong third-quarter report but at least one note of warning was sounded on Wall Street that the stock may be getting ahead of itself.

Wedbush Morgan gave the router maker its due credit for beating consensus estimates for the September period but kept its neutral rating on the stock, saying it believes Netgear's revenue outlook for the fourth quarter, although above the current average analysts' estimate, is actually rather cautious.

"While we believe the company is navigating the macro environment successfully and appears to be taking some market share from


(CSCO) - Get Report

, Q4 guidance implies only 1.5-6% q/q

quarter-over-quarter growth suggesting some caution with the holiday season and with SP

strategic partner spending," the firm said. "Despite strong execution, we continue to see risks to the story and advise investors to remain on the sidelines."

The stock rose $3.47, or 12.3%, to close at $31.75 with volume of 2.1 million roughly five times the issue's trailing three-month daily average of around 430,000. The session-high of $31.93 eclipsed the stock's previous 52-week peak of $30.09, and was roughly 85% above its July 1 low for the year of $17.44. The shares have now gained more than 30% so far in 2010, and more than 50% in the last 52-weeks.

After Tuesday's closing bell, Netgear reported third-quarter non-GAAP earnings of $16.1 million, or 45 cents a share, on revenue of $236 million, up from its year-ago equivalent profit of $11 million, or 31 cents a share, on revenue of $171.1 million, and ahead of the average estimate of analysts polled by

Thomson Reuters

for earnings of 38 cents a share on revenue of $221.7 million.

"For the third quarter of 2010, we are extremely pleased with our strong back-to-school performance in North America, which helped generate 62% year-on-year growth in that region," said Patrick Lo, the company's chairman and CEO, in a statement. "We also continue to experience a recovery in demand among small business customers worldwide, as reflected in our strong third quarter SMB

small-to-medium business revenue."

For the fourth quarter, the company forecast revenue ranging from $240 million to $250 million, and a non-GAAP operating margin of 11% to 12%.

Wedbush lifted its 12-month price target on the stock to $33 from $26 and boosted estimates for fiscal 2010 and 2011 following the news but said the strong back-to-school season that delivered Netgear the better than expected results for the September period was likely in part the result of heavy promotions, throwing some cold water on the idea that the company is building up momentum.

The high end of the company's revenue range implies 6% growth, as the firm stated above, for the fourth quarter, a slowdown from the 20% growth Netgear enjoyed in the most recent period from its second-quarter total of $196 million. Wedbush itself was already modeling for revenue of $245 million in the December period, so it was less than impressed with the topline guidance. It also felt the company's operating margin view was nothing to write home about.


operating margin guidance of 11-12% was in line with the original 11.5% estimate reflecting higher revenue offset by

a greater mix of lower margin service provider business and what we believe is higher expected discounting headed into the holiday season," the firm said. "Overall, we think retailers are tightly managing inventory and continue to remain cautious on consumer spending, which may be contributing to Netgear's somewhat conservative stance


Ahead of the report, Wall Street was split on Netgear. Of the eight analysts covering the stock, four, including Wedbush, were at hold, three were at buy and one was a strong buy. At current levels, there's an argument to take some money off the table as the stock is straining against the median price target of $32, and its forward price-to-earnings ratio based on 2011's consensus view is sitting at 15.6X vs. Cisco's P/E multiple of 11.8X.


Written by Michael Baron in New York.

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Michael Baron


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