Occasionally while running my deep-value screens, I will come across names that are unfamiliar. Now, these same screens are prone to "repeat offenders," companies that perennially pop up, so it is great to see new possibilities -- especially in this environment where value has seemingly dried up. It is wise to take your time with these situations. They may seem "cheap" for very good reasons.
In my "double-net" screen (companies that trade between 1x and 2x net current asset value, or NCAV), I ran across Arlo Technologies (ARLO) , a hardware name that was spun off from Netgear (NTGR) last August via an IPO.
While the IPO price was $16, shares closed the first day of trading (August 3) at $22.10. But it's been downhill ever since, and shares closed Tuesday at just $4.15. A great deal of damage was done upon the release of fourth-quarter earnings in early February, when shares were literally cut in half on the back of lowered guidance.
The guidance cut was massively. First-quarter revenue estimates were reduced 60%. With that backdrop, the fact that the company's losses were lower than expected for the quarter did not matter.
That has left shared of ARLO deeply depressed, and perhaps with legitimate reasons: Consensus earnings estimates are calling for the company to be in the red for as far as the eye can see -- through 2021. The drubbing that the shares have taken has pushed the company into "double-net" land, and shares are currently trade at 1.7x NCAV.
The balance sheet, however, is fairly solid -- at this point anyway. ARLO ended the year with $210 million, or $2.71 per share, in cash and short-term investments, and $20 million in debt. It also trades at 1.23x tangible book value.
The problem here is obvious; cash on the books is not all that meaningful if the company will be burning through it due to losses. That is a trap that investors can fall into -- a good-looking, cash-rich balance sheet at a point in time that is transient as losses mount.
Still, I will be paying attention to this one, because with expectations so low, and with the growth crowd having abandoned the name, any signs of life could be rewarded (emphasis on the word could). The company has but two quarters of earnings releases under its belt since going public, and the release of first-quarter earnings (date unknown) should be interesting.
Not a great start for ARLO as a publicly traded company for sure, and not one that I am interested in at this point, but I will be watching from the sidelines.
