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Directors are buying shares in this tech stock after its big plunge

It’s a vote of confidence that directors in Netcomm Wireless Ltd (ASX: NTC) are snapping up shares in the company after its big crash two weeks ago.

The stock collapsed 46% after management issued a disappointing FY19 outlook even as it posted a near six-fold increase in earnings in August.

Its dismal performance is a far cry from other small cap tech stocks like WiseTech Global Ltd (ASX: WTC) and Altium Limited (ASX: ALU), which are the reporting season superstars.

But I believe the brutal sell-down in Netcomm is an over-reaction and insider trades are a big boost in confidence in the stock.

The company’s non-executive director (NED) David Spence used the price weakness to buy 60,000 new shares for nearly $47,000 on-market yesterday to add to his initial holdings of 25,000 shares.

Fellow NED Stuart Black has also jumped in by buying 20,000 new shares at 76.5 cents a pop to lift his holdings in Netcomm to 220,000 shares.

The company, which supplies fixed wireless equipment to the national broadband network (NBN), shocked investors by saying that underlying earnings before interest, tax, depreciation and amortisation (EBITDA) will be flat in the current financial year as revenue growth slows to 15% to 20% (from 69% in FY18).

Further delays to the rollout of the NBN to new premises are to blame and the same reason behind the profit downgrade by Telstra Corporation Ltd (ASX: TLS).

Netcomm’s earnings are also hit by rising component costs, a margin squeeze as the company ramps up sales of lower margin products and a $9 million investment in developing new 5G products.

The slower rollout of the NBN is disappointing but the revenue opportunity isn’t lost – it’s just deferred.

Longer-term investors should also ignore the noise and use this sell-off to buy the stock as management is forecasting the next step-change in revenue and earnings in FY20.

The growth is being driven from a few sources besides sales to the NBN. Netcomm has signed a few contracts with North American telcos, like AT&T, to supply its 100mbps wireless equipment for rural broadband and its 5G solution.

Netcomm’s chief executive Ken Sheridan described 5G as a “once in a decade” technology wave and he aims to make the company one of the first few in the world to have a commercial fixed wireless 5G solution.

It might take a while before the stock regains favour with investors, but those willing to wait are likely to be well rewarded.

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Motley Fool contributor Brendon Lau owns shares of NetComm Wireless Limited and Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Altium and WiseTech Global. 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 Scott Phillips.

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