Novatel (NVTL) Downgraded to Underperform

We downgrade our recommendation for Novatel Wireless Inc. (NVTL) to Underperform following its second quarter 2010 financial results, significantly below the Zacks Consensus Estimate. Novatel is facing intensifying competition for its legacy embedded solutions products that results in overall lower ASP and lower gross margin. Novatel has provided a tepid financial outlook. We do not find any immediate growth catalyst for the company and believe Novatel will incur loss for full year 2010.

Intensifying competition for embedded modules is the major concern for Novatel. In addition to its traditional rival, Sierra Wireless Inc. (SWIR), the company is facing significant challenges from newly launched products by large manufacturers, including Qualcomm Inc’s. (QCOM) Gobi chipset that combines broadband modem technology for high-speed 3G networks with GPS functionality. In the second quarter 2010, embedded modules generated a mere $0.4 million compared with a massive $35.8 million in the year-ago quarter.

Loss of market share in the embedded solutions market resulted in lower ASP that in turn reduced the second quarter 2010 gross margin to 18.9% compared with 22.1% in the year-ago quarter. Novatel forecasts 20% gross margin for the third quarter 2010, well below its traditional 28% range. Additionally, Novatel is suffering from huge customer concentration risk. The company is yet to launch any products for the lucrative next-generation wireless networks.

Although the company has developed a niche for its MiFi mobile intelligent hot spot, we foresee increased competition from latest version of smartphones with in-build WiFi capabilities. In the second quarter 2010, MiFi sales declined by a whopping 26% sequentially.

NOVATEL WIRELES (NVTL): Free Stock Analysis Report

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