UBNT and judging arguments


I had hoped for an analysis of why Ubiquiti’s M-score was high (i.e., not negative enough). As Captain CCS is fond of saying, it is not enough to know what the chart (substitute M-score) is saying, you need to know why it is saying what it is saying.

So, I spent way more time than justified to find the answer. If the M-score could speak instead of just flash a number, it would say, “your sales grew so you are suspicious, your accounts receivable increased more than your revenues increased, and you had bigger cash flow adjustments due to changes to accounts receivable, inventory and vendor deposits. Oh, and you improved your balance sheet, less leverage.”

Basically, if you have no year-over-year changes and no adjustments from net revenue to cash flow from operations then the M-score is more negative than -2.22 and you are “not a manipulator”. Well, actually, your score would be -2.136 which is less negative and you ARE a manipulator. At least that is my calculation.

Let’s go into a bit more. There are 8 factors. Seven of them are “indexes” of year-over comparisons. Each index has a coefficient or multiplier. Six of the coefficients are positive numbers, one is negative. So six of the indexes make the M-score less negative (bad), one makes it more negative (good). The eighth factor is a major one for Ubiquiti and essentially marks them as a manipulator regardless of everything else. That 8th factor is the TATA factor (their label, not mine). That is derived just from current year numbers: Total Accruals to Total Assets. In simple terms you take the net income, subtract non-operating income and subtract cash flow from operations and divide by total assets. In even simpler terms, you take all those adjustments that reduce operating income to operating cash flow and divide that by total assets. And what are those adjustments for Ubiquiti? Changes to accounts receivable, inventory and vendor deposits. The coefficient for TATA is more than 4 times larger than the next largest coefficient and almost 40 times greater than the smallest two. And the result is 0.84 points on the M-score. Now, the next biggest number is the Days In Receivables Index and days increased 30% and a .92 coefficient adds 0.28. The sales growth (Sales growth is not itself a measure of manipulation. However, growth companies are likely to find themselves under pressure to manipulate in order to keep up appearances.) added 0.266 points and there you are.
Well, there was a .035 add for lower margins year-over-year. Finally, to add insult to injury (IMO) Ubiquiti decreased its debt and the leverage index is the one with the negative coefficient so that cost them 0.026 beneficial (negative) points.

Got that? The explanations for the receivables and inventory have been well covered. I have nothing to add. They either are or are not stuffing the distribution channels. I see no motive for Pera. Maybe someone down in the trenches is trying to look good, but I think Pera explained all this in the last conference call.

KC, long UBNT and added post Citron


Rats, screwed up the AGAIN. Blush.


KC, I don’t know what it is you think you screwed up, but thank you for taking the time to do what I didn’t know enough to do.


The italics “off”. So the last part of the message was all italics rather than just their comment on fast growers being more likely to be manipulators. Then in the “screwed up” message I discovered that you can’t put the <> with the /i inside in a message to convey that this is what happened… Oh, but I did make an error. Most of those factors use current year, t, divided by previous year, t-1. But not the Gross Margin Index and maybe another which divide t-1 data by t data. Improving gross margin is a good thing.

BTW, I have attempted to calculate the m-score for LGIH as I assumed it would be flagged a manipulator. I did get a -1.165 based on the 2016 annual. If you have Gurufocus subscription or other access it would be interesting to see if they have the same number, and also I am curious whether they also tag ANET and NVDA as manipulators.


You can get the most recent quarter M-scores from Gurufocus without a subscription, just not the older ones. Their June 2017 score is -0.45.


I started wondering is whether this industry would generally have low M-scores, but that’s not the case for the two other major home builders I checked, Toll Brothers and NVR. (And by the way, NVR’s growth has also been very good.)

And this article raises questions about Ubiquiti’s increasing inventory levels:


The summary:

Inventory levels at Ubiquiti have risen from 16 DSI to 103.5 in six years.

It appears that each time inventory jumps up management uses the same excuse.

We can find no explanation why inventory levels need to be so high.


Typo correction:

“I started wondering is whether this industry would generally have low M-scores”

should be

“I started wondering whether this industry would generally have high M-scores”

Thanks, Ed.

You can get the most recent quarter M-scores from Gurufocus without a subscription, just not the older ones. Their June 2017 score is -0.45.

Ok, I think that puts the M-score issue to bed, for me. My m-score calculation was for December 2016 and I am not inclined to dig through quarterlies to get Q’s 3,4,1,2 to check my calculations. My conclusion is the the M-score, in itself, is pretty meaningless. I mean, I don’t think anyone believes that LGI Homes is manipulating revenue but the m-score indicates it is “likely a manipulator”. And the reason for the score is primarily the negative cash flow from operations and the growth rate, I think.

As far as Ubiquiti is concerned, they eventually (or in the next few quarters) need to stabilize the days receivable and inventory to match growth rate. My opinion is that the “problem” relates to lean management coupled with new products coupled with “quaint” distributor system–which is a polite way of saying they don’t know what they are doing in this part of the business. I know that one replacement part I received had a manufacturing date (as I recall) several years prior. I know I commented to the seller about the age of the part and a missing fitting.

Thanks for the Seeking Alpha post on inventory. I think I will keep the small core position and cash in the larger trade position sometime next week, “God willin’ and the creek don’t rise”.



I posted more on the inventory issue on the other major recent thread here about UBNT:


The article I cited had several intelligent comments posted by readers that questioned the article, saying that the increase in inventory mainly had the effect of making the products much more available, whereas they were hard to get before the inventory increases.