Novatel Upgraded

We are currently upgrading our recommendation on Novatel Wireless Inc. (NVTL) to Neutral based on its current valuation. The stock price has declined sharply by more than 56% in the last year and currently trading at the low-end of its 52-week price range. We believe this low valuation level may provide a cushion for further downside.

Novatel provided a very weak first-quarter 2011 financial outlook. Management cited lower sales of its 3G access products and ongoing customer transition to next-generation 4G products are the primary reasons for this poor guidance. We remain concerned regarding Novatel’s business with Verizon Wireless (VZ), an important customer for its MiFi intelligent hotspots.

A Bloomberg report forecasted that Verizon will soon start selling Apple Inc. (AAPL) developed 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, which does not require MiFi. If this report comes true, it will be a serious concern for Novatel. MiFi currently constitute more than 48% of Novatel’s total revenue. Loss of a big customer like Verizon will definitely affect the company. However, Verizon did not give any specific date from when it will start selling its embedded iPads.

On the other side, recently acquired Enfora may place the company on solid foothold in the lucrative wireless machine-to-machine (M2M) markets.Novatel has acquired privately held Enfora, a M2M intelligent asset management solutions provider. Enfora has along list of clientele including several enterprises, applications service providers, OEMs and distributors. This acquisition will place Novatel firmly in the fast growing M2M markets. Various industry sources estimated that mobile M2M market may reach $20 billion by 2014.

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