Why Ubiquiti is probably undervalued

New Seeking Alpha article gives seven reasons which could be keeping Ubiquiti undervalued. Most of them actually make some sense: https://seekingalpha.com/article/4101521-7-reasons-ubiquiti-…

Here is my edited, much shortened, and paraphrased summary.

Analysts discouraged by CEO
Robert Pera is an entrepreneur with an entrepreneurial mindset. On earnings calls with analysts he has made it abundantly clear that he focuses on the long term success of Ubiquiti and not quarterly margins, revenue, or cost fluctuations…Due to this, analysts have been predicting for years that Ubiquiti’s net margins will eventually erode to the norm for the industry.

Light Coverage by Analysts
Possibly due to the fact that Mr. Pera owns 71% of Ubiquiti and therefore cannot be pressured to sell or raise capital, or possibly due to not playing by Wall Street’s typical rules, there are few analysts. Only 4 or 5 sell side analysts follow Ubiquiti. On the last Conference Call, only 4 asked questions.

In 2015 Ubiquiti had a large account fraud loss of $39M of which they recovered less than half. The explanation for the loss was poor decisions on the part of two accounting staff. The chief accounting officer resigned or was terminated and an accounting firm was hired to fulfill the CFO/controller role. CEO Pera seems to be content so far with having the accounting firm act as controller. I believe that not having a CFO to relate to analysts keeps a damper on the share price. An effective CFO hire would likely be well received by Wall Street, and take the stock price to higher multiples.

Operating Margins/ Business Model
One of the big recurring knocks against Ubiquiti has been high operating margins. Yes, that’s a negative say some analysts, because that means profits are too high for the industry and must come down closer to the average. Ubiquiti’s unique business model based on evangelism marketing rather than highly paid sales people, and low priced but quality products are to blame. So when gross margins declined slightly in the Dec quarter, the stock tanked 25% in a few days. Obviously, those selling the stock did not pay attention to the fantastic momentum Ubiquiti was building with its new products. The share price of Ubiquiti is held back by this anticipation of analysts calling for lower margins.

Small Float/High Short Percentage/CEO Ownership
Ubiquiti has 80M shares outstanding of which 72% are owned by insiders. Founder and CEO Pera owns 71%, and he rarely sells any. The small float created by large insider ownership creates volatility in the stock, as short sellers can manipulate the stock negatively in the short term. Today’s short percentage of float is over 32%. I see this as an opportunity as the company continues to innovate and outperform and the shorts must cover their bet by buying shares.

The small float also creates liquidity issues in the stock for large fund managers. Although Ubiquiti is a mid-cap stock with a $5.3B market cap, the floated cap is only $1.6B. I see this as good for you and me. We have a more exclusive club.

The Real Growth Rate – Free Cash Flow
It’s refreshing to see a company with GAAP and Non-GAAP earnings and free cash flow that are very similar.

Ubiquiti’s earnings have grown so fast (Fast Graphs lists the growth rate at 67% since going public while I calculate 47% since January 2013) that the share price just has not kept up… Ubiquiti is not getting credit for taking so much of operating earnings to the bottom line on a diluted basis after share repurchases.

Pera does not dilute shareholders (and himself). Since 2013, share count has been reduced from 87M to 80M.

No Dividend
Although Ubiquiti has regularly returned capital to shareholders through share repurchases, it does not pay a dividend. I believe dividend-paying stocks, especially those of the “safe” characterization, trade at premium valuation. There is a huge set of retail investors and income funds that will cross UBNT off their list of potential investments due to it not paying a dividend.


Is your UBNT position still in the 3% range, Saul, or have you perhaps added some to that subsequent to your rapid moves around the time of the latest earnings announcement?

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Nice summary. I think the CEO wants to see higher share price and he feels personally hurt with shorts. So, he can hire a CFO and institute a very modest dividend. I think both these actions could easily push the shares above $70 and possibly to $75 range.

I think he may even consider dividend but probably not CFO hiring because any CFO hire would require stock options and he is not going to give up his stock :slight_smile: