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Summary

  • Ubiquiti's main product Airmax had very fast growth in China recently.
  • Enabled by Airmax's disruptive pricing, the monthly charge of some wireless broadband plans in China is only 15% of US.
  • Some WISP in China quickly expanded to thousands of customers within a few months.
  • The fast growth in China, the cost advantage in the economics, and the fact that they choose Airmax despite other low cost suppliers shows Airmax's potential.

Since I posted my last article to give a full introduction on Ubiquiti's (NASDAQ:UBNT) business and its attractive valuation, the stock has been rising for 9 days without any interruption. This kind of price behavior has been so rare that I don't remember seeing it in the past before. Perhaps there was really a short squeeze initiated?

Out of curiosity, I have checked Interactive Broker's short borrowing cost, and the cost is 4% per year, with 30,000 shares available at the end of day (but it was 0 at some point in the middle of the day). This number doesn't show a major short squeeze yet, but it is much higher than other stocks' borrowing cost which is less than 0.5% - 1%.

Frankly, although it is nice to see a price recovery in such an amazing speed, I don't really care about that too much. When investing in a high growth company, time is on my side. Also, as a long term fundamental value investor, before we commit to a position, we have to be prepared for the scary price actions which will shake out the weak-hands at any time, and we have to have the ability to digest any fundamental changes and estimate its impact to the long-term value.

While searching for recent fundamental news, I found some interesting post in the forum about the amazing growth of one WISP in China. When I look further into UBNT's China Forum, I found the original post in Chinese language with a lot of interesting photos in it.

Some main takeaways from what I learned in the post:

1. This WISP in the HeBei province of China started 1 year ago; within a few months, it expanded to thousands of customers, and covered dozens of villages within 2 counties. Recently it got two more counties' businesses.

2. This WISP cooperates with China Mobile which is a big cell phone company equivalent to AT&T or Verizon in US. They do their ads under China Mobile's brand name.

3. The annual wireless broadband plan (8M bps) costs only $110 USD ($9 per month) which is about 15% of the cost in US. From the picture of the ads, it seems that this plan also includes digital phone service or free minutes in cell phone service, not just broadband internet.

4. This WISP said they have tried other equipment based on other people's suggestions, but eventually they chose Airmax because of its stability.

5. They used to do cable TV business before switching to Airmax. They know that not only it costs much more to establish a wired connection, but it also takes much longer. (15+ days for wired connection vs. 3 days for wireless connection)

6. From the photo of airControl software, it seems to be able to handle hundreds of nodes in a single client, and has the ability to zoom-in and zoom-out.

7. One distributor in China said they now have "more and more customers using Airmax in different parts of China, such as Inner Mongolia, Henan, Szechwan, Sinkiang, Guizhou." (Most of these provinces are less dense areas in China, but Szechwan Province and HeBei Province are high density provinces.)

Although UBNT's China Forum just started recently, it already has a lot of posts there. I am not sure how much revenue Ubiquiti has in China right now, I would expect not much since the fast growth in China just started recently. However, it is not about the actual sales number in China, but the potential it shows us. The most exciting part here is not just the fast growth of that WISP, but instead, it is the economics behind it:

A big well known wireless company subcontracts a rural county to another independent contractor, and they can provide fixed wireless broadband with digital phone or mobile phone service at $9 per month.

Although China's average salary is still much lower than US, especially in the countryside, we have to keep in mind that the average price of all kind of consumer goods is actually higher than US. This applies to houses, food, clothes, electronics, gas, and cars. The only exception is the labor or labor intensive goods such as toys which are still much cheaper than US. In other words, while China's living cost is comparable to US, this broadband service they provide is much cheaper. This shows the power of Airmax. Without Airmax's disruptive pricing, it is not possible.

There are also a lot of hardware manufacturers in China, which enjoys low labor cost, and language advantages, yet we see this WISP still chooses Airmax for its quality. This explains why Airmax could have generated such a high growth across the globe in the last few years.

As Pera said when he was asked how much additional scales is left in Airmax: "I don't know, but the growth of airmax always surprises me." When we really think about the number of people in the developing countries or rural parts of developed countries who still don't have a stable, low cost, yet high performance broadband service, we should have the answer for this question, especially when the wired connections cannot reach these places cost-effectively.

As I stated in my last article , when investing in a high growth company, getting the big picture is much more important. In other words, we want to know the growth rate in the future, not just the past. Therefore, analyzing the potential by its inherent competition strength is a critical part of the investment thesis. This is why I think that Chinese WISP's story can lead us to find more answers to this important question.

Disclosure: The author is long UBNT, TSLA, LUK, OCN, WFC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Ubiquiti Networks: Exciting New Front In China