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Here’s why the Netcomm Wireless Ltd share price soared 26% today

Credit: Thomas of Tortuga

Up 530% in the past twelve months, according to Google Finance, can anything stop Netcomm Wireless Ltd (ASX: NTC)?

Some had argued the company was greatly overvalued, trading at more than 100 times its 2014 earnings in recent days.

A fresh contract win this morning blew those estimates out of the water, with Netcomm shareholders piling in on the news that the company had signed a Master Purchase Agreement with ‘a large USA based telecommunications carrier‘.

Netcomm will supply the fixed wireless devices required to connect households and businesses to a rural broadband network which will be built by the US telco partner. Managing Director David Stewart was upbeat on the contract win, calling it ‘a key milestone’ in the company’s global growth strategy for regional broadband.

Mr Stewart also commented that ‘we see potential for this technology solution in many different countries‘ teasing further international opportunities for the $300m company. Certainly if Netcomm can deliver on its promise to become a global provider for these types of network, shares are likely to be worth more than the current $3.25 apiece.

A word of warning, however…

It was interesting to see that the Netcomm price rose so rapidly in the absence of any commercial specifics (such as likely boost to earnings for Netcomm), which were withheld due to confidentiality agreements. While it does appear to be a significant contract win, the shares soaring so quickly on limited information says to me that the stock is in the grips of a considerable amount of speculative buying.

Netcomm now trades on a Price to Earnings (P/E) ratio of 139 which seems astronomical even when taking into account potential earnings growth. As a quick example, Netcomm would have to grow its earnings by 400%-800% in the next few years to bring its P/E down to a more average 35 or 17.

While I do expect Netcomm to continue growing, I believe it would take a brave or foolish (lower case ‘f’) investor to buy shares with so much growth already factored into the price.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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