EUR 442.45 For Business Accounts Only

Upcoming Distribution Boosts Free Float of Pressured Tech IPO

Following its IPO in August, Arlo Technologies, Inc. (ARLO) will see its free float increase from the distribution of the remaining stake currently owned by Parent NetGear, Inc. (NTGR) in Q1FY19. The Spin has pressure on its growth prospects, and other comparable tech IPOs GoPro and FitBit saw sharp losses since their own listings, indicating major hurdles ahead for ARLO. Meanwhile, NTGR expects to maintain its own modest growth absent of ARLO's dragging numbers.

The Edge View - What's Interesting?
Smile, You’re on Camera! Unfortunately, that’s not the case with investors of ARLO, the security camera maker and Spinoff from networking hardware manufacturer NetGear. The company has had a wild ride since its stock market debut in early August and now trades at a 21% discount to its IPO price of $16. The Edge believes that ARLO’s niche connected cameras market is fraught with risks, and it is best to hold off on until we gain further clarity on the company’s future operating model.

NTGR (Parent ex-ARLO): We are cautiously optimistic on NTGR and believe that it is a long-term margin expansion story with the Spinoff of ARLO acting as the immediate catalyst. Although ARLO has helped grow NTGR’s top-line significantly, the cost associated with the business has also weighed on profitability for the core business. NTGR has a strong market share in the space in which it operates, but we are aware of its growth limitations, given it operates in a mature networking hardware market. The company reported robust revenue growth in Q3FY18 but fell short of its net earnings compared to the previous year. For FY19 the management expects mid-single-digit revenue growth and non-GAAP operating margin of 10-12%.

ARLO (Spinoff): Following the distribution of NTGR’s remaining 84% stake, ARLO will see a significant increase in free float from its current 16%. This creates an opportunity for larger market participation in the company which was previously absent. However, we are deeply concerned about ARLO’s hardware-centric revenue model that continues to burn cash amidst competitive pressure from the likes of Google and Amazon. We do like that it is the market leader in connected security cameras and has no debt on its balance sheet. The stock is down more than -21% from its IPO price of $16 and remains on our watch-list until we get more clarity on its operations. The company announced its Q3FY18 earnings, which beat expectations but continued to report an adjusted net loss of $3.4m. The price declined as the company guided a decline in non-GAAP gross margins for the next quarter to 13-15%, which confirms our thesis on ARLO’s heavy cost pressure.