Novatel Downgraded to Underperform

We downgrade our recommendation on Novatel Wireless Inc. (NVTL) to Underperform, ahead of its fourth-quarter 2010 financial results. 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), a important customer of Novatel for its MiFi intelligent hotspot, may generate lukewarm demand in the first quarter of 2011 attributable to its huge modem inventory.

A recent 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 to introduce 4G MiFi devices soon.

If this report comes true, it will be a serious concern for Novatel. MiFi currently constitute more than 42% 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 smartphones are having WiFi capability inbuilt, eliminating the need for a separate modem like MiFi. Low-cost Asian manufacturers such as ZTE and Huawei Technologies have already launched their own version of intelligent mobile hot spots forcing competitive pressure on Novatel. In the third quarter of 2010, MiFi sales declined by more than 16% sequentially.

We do not find any immediate catalyst for Novatel and expects the company to report a net loss for the previous quarter. Currently, Novatel holds a short-term Zacks #4 Rank (Sell) on the stock.

NOVATEL WIRELES (NVTL): Free Stock Analysis Report

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