Ubiquiti Networks: An Unusual Combination Of Value And Growth

Aug.14.14 | About: Ubiquiti Networks, (UBNT)

Summary

Ubiquiti Networks sells its products at a price point no other firm has been able to match while still maintaining attractive margins.

Ubiquiti Networks has a very impressive balance sheet to go along with substantial growth numbers.

The most recent earnings report showed once again strong growth and a reduction in inventory (a concern after the last earnings report).

For those unaware, Ubiquiti Networks, Inc. (NASDAQ:UBNT) is a wireless communications networking company that designs, manufactures and sells its disruptively priced hardware worldwide. The company provides a wide range of products targeted at providing internet and communications services to untapped rural and emerging markets. UBNT is able to provide its services and products at a price that its competitors simply cannot compete with in the given target markets.

Despite its low price point, UBNT maintains very impressive margins. This anomaly is mostly due to UBNT being run quite differently than many other companies. UBNT's founder and CEO, Robert Pera, runs his company by adhering to basic engineering principles; focusing on process efficiency and supply chain optimization. This mindset insures that the company is getting the most utilization possible out of its capital and assets. UBNT's corporate strategy is a step away from conventional "blind cost cutting" popular with many companies trying to get more dollars to drop to the bottom line. So far, this strategy has allowed for amazing growth given a very limited period of time.

Table from UBNT Quarterly ReportClick to enlarge

To put this growth into numbers, let's start by looking at UBNT's revenues. In UBNT's 2014 Q4 earnings report, they tell us that Q4 sales were up 54% year-over-year to $156 million. Even better news was that Q4 EPS was up 70% year-over-year meaning that all those new sales made it down to the bottom line. A common theme in the market recently has been companies showing sales growth but none of that growth making it down to the net income. This is typically due to the company's margin declining with its increase in revenue; however UBNT has managed to keep its margins north of 30%. Moving on to the PEG ratio, .76, we can see that all this growth is coming at quite a discount (a PEG <1 indicates a company may be undervalued). Based on management's guidance and the slew of new products the company has hitting the market, there is good reason to believe that this growth will be sustained if not increase.

Table from UBNT Quarterly ReportClick to enlarge

These positive quantitative signs of growth are complimented with equally positive qualitative/anecdotal signs of growth. UBNT is seeing growing sales in China, South America, and EMEA (Europe, Middle East, Africa) as the WISP movement there brings internet to places once out of reach. As you can see in the table above, sales are up significantly year-over-year in every geographic category. Stateside, the FCC has recently added additional bandwidth to the 5 GHz (the spectrum that UBNT's product use) spectrum, which should be a boon for UBNT's domestic growth.

Let's take a closer look into UBNT's balance sheet and the numbers behind this aforementioned growth. We will use Cisco (NASDAQ:CSCO) as a benchmark because it is a much more mature and established company operating in the same sector. Looking at the balance sheet, UBNT is in a fantastic position. The first thing that jumps off the page is UBNT's debt/equity ratio of just .26 compared to CSCO's ratio of .37. This means that UBNT has been able to finance its tremendous growth without having to borrow much capital, thus it does not have hefty interest payments that create drag on the bottom line. Next we will look at the Quick Ratio, which essentially tells us a company's ability to pay short-term costs and expenses (liquidity). UBNT has a Quick Ratio of 5.30, meaning it has $5.30 in liquid assets for every $1 of short-term obligations. As a comparison, CSCO has a Quick Ratio of 3.40.

From looking at its balance sheet we can ascertain that UBNT has figured out a way to grow extremely rapidly without having to take on large loads of debt. In my eyes this is a far superior method of growth because as a UBNT shareholder I do not have to worry about mounting debt interest payments causing swinging fluctuations in earnings. Additionally UBNT's attractive Quick Ratio shows us an ability to keep its relative inventories down, leaving capital available for more beneficial uses like R&D investment, share buybacks, and possibly a future dividend.

While the company is currently positioned very well there are a few potential future risks and obstacles. As mentioned earlier in the article, the FCC recently added bandwidth to the 5 GHz spectrum that UBNT's products use. This is a positive for all companies in the communications sector right now, but this brings to question what would happen if there was a crowding of the 5 GHz spectrum. This is not a reason for immediate concern, but should definitely be considered. In UBNT's most recent quarterly report management stated that included in their "estimates is an adjustment for recent geopolitical developments that could require us to delay shipments until business can be resumed within regions afflicted by conflict." Now this may be a small hiccup, but if the issues in the Middle East, Ukraine, and West Africa do not clear themselves up soon, the affects may drag on UBNT's Q1 2015 earnings.

To recap, right now Ubiquiti Networks represents a very rare intersection of high growth and great value. The fantastic growth metrics UBNT shows coupled with its pristine balance sheet make it a diamond in a currently rough market.

Disclosure: The author is long UBNT. 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.