Novatel Gets Downgraded

We downgrade our recommendation for Novatel Wireless Inc. (NVTL) to Neutral, which means the stock should perform in line with the broader market. The company is facing intensifying competition for its core embedded solutions for wireless access. In addition to its traditional rival, Sierra Wireless (SWIR), Novatel is facing significant challenges from newly launched products by large manufacturers, including Qualcomm Inc. (QCOM) and L.M. Ericsson (ERIC). Qualcomm has launched its Gobi chipset that combines broadband modem technology for high-speed 3G networks (both EV-DO and HSPA) with GPS functionality. The Gobi solution has significantly captured embedded solutions market share from Novatel. The market for broadband wireless access solution is emerging rapidly in terms of technological innovation and demand. Although Novatel has developed a niche in its MiFi mobile intelligent hot spot, we anticipate increased competition in the near future. Qualcomm, Huawei Technologies, and ZTE are on the verge of introducing their own version of intelligent mobile hot spots. Novatel has also hinted at sequential demand weakness in the fourth quarter of 2009 for its MiFi product line. Nevertheless, Novatel has generated a record high level of free cash flow and significantly improved its gross margin. In addition, the company has a very strong balance sheet, capable to support its long-run business endeavors. Management has taken a decision to extend the MiFi platform with new features and functionality, as well as building a MiFi ecosystem through organic development and strategic partners. According to our assessment, all these positive factors are already reflected in the current valuation, leaving little room for above-market gains.

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