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Summary

  • This company is an alternative to DSL and cable, with a large opportunity to capture market share in rural areas.
  • It's a very high-margin business, generating a higher operating margin than Apple.
  • With the help of a short squeeze, shares could hit $50 - a 20% upside.

Many rural areas still can't get Internet access. This isn't just an issue in rural parts of the U.S., but also in emerging markets. Yet, there is a solution. A select number of companies offer Internet access, but not via traditional DSL and cable.

These systems are very easy to set up, using high-powered radios deployed at base stations, and routers installed at homes and businesses to receive data and connect to the Internet

Ubiquiti Networks (NASDAQ:UBNT) is one of the more underrated plays on the internet market. Ubiquiti sells wireless equipment to service providers and enterprises. Its product portfolio provides network infrastructure for wireless broadband, wireless backhaul systems, WLAN routers infrastructure, and video surveillance systems.

There are 613 million global broadband subscriptions, which implies a large market opportunity for wireless Internet service providers, as the current global population stands at 7 billion.

Its airMAX product accounts for just over 60% of revenues. It allows users to access the Internet without DSL and cable. The ease of installation and affordability make it a very strong product, where the rural market is largely under-penetrated.

Again, the price points of Ubiquiti's airMAX products are very affordable, which is very important, as most WISPs are based in rural areas or emerging countries, where income is generally low. This lower cost base allows the WISP to grow its business and create new markets.

Ubiquiti's business model requires it to invest heavily in R&D, but it also has no direct sales force, relying on the quality of its product and user community to grow.

The margins for this business are more than impressive. Its operating margin is a whopping 34%, compare that to Apple's (NASDAQ:AAPL) 28.6%. On a per employee basis, Ubiquiti is pulling in $2.8 million per employee, versus Apple's $2.2 million.

Ubiquiti is also a short squeeze candidate. Its short interest is a high 24%. The stock also showed up on a Barron's screen for stocks that might be included in a new exchange-traded fund that will capitalize on short coverings. Ubiquiti made the list as a stock with a 20% short interest and at least four quarters of earnings growth.

A $50 price target for Ubiquiti assumes Ubiquiti should trade at a P/E in line with the industry average of 25. Analysts' average price target is also right at $50.

Source: An Underrated Play On Rural Internet Too Cheap To Ignore