Barath Balu

Value, growth, chipmakers, long-term horizon
Barath Balu
Value, growth, chipmakers, long-term horizon
Contributor since: 2012
Basically what Mingran said. I'd like to add that satellite internet is far more expensive as well. At this stage, it really is just a proof of concept. It will be years before we see any implementation, and longer before we see a marketable implementation
To be honest, I was in the same boat as you, but I changed my mind after I began to understand the industry more. Competitors GM's are ~70%, but they offer better tech and customer service. UBNT offers mostly standard tech, and no formal customer support, so they serve a different set of customers entirely. They are already much cheaper than their high end competitors, and much better than their low end competitors, so they can probably avoid margin erosion.
To be honest, I really don't know what they're doing to hedge. I'm just a college student, so I don't get calls with IR until summer internships!
Hi Dave,
I actually don't subscribe to Barron's, so I really only read articles that my professors or colleagues send me. In general, I'm not a huge fan because their analysis tends to be superficial. I read their bearish piece on UBNT from a couple months ago, and it was pretty poorly done. It really showed that they didn't understand UBNT's business model or the industry.
One of their main points was that they expect SG&A and R&D to increase substantially because its currently too low compared to their competitors. That's it. They basically said, because Cisco spends this much, Ubiquiti should be too. This indicates that the author really did not bother to look beyond the 10k...
Hi Davis,
I'm glad you liked my article! UBNT will not be able to generate any recurring revenue with its current product line. In fact, they explicitly avoid adding in a SaaS component to their hardware because it would put off many of their customers. Instead they offer software that operates on the customer network for no cost. Personally, I don't think they really need to yet. They get enough new activations, and replacements/product refresh will continue to drive revenue. New product launches will also help in the future.
No that's just my own estimate that I modeled using data from ITU's World Telecom Statistics. But the idea behind this thesis is that while the bandwidth and reliability of wireless has always trailed that of wireline, but has gotten to the point that its good enough for many. If you've ever read any of Clayton Christensen's works, this is a classic candidate to be a disruptor.
Actually, Bloon uses Ubiquiti's equipment. The baloon itself uses a Rocket M2 and the ground receiver uses a Rocket M5. In any case, I think the idea has potential in the very long run, but right now its more of a proof of concept I think. It's not feasible as a mainstream solution yet.
Thank you for the kind words!
I'm not very concerned about the P/B ratio in this case. When a company has a high P/B, it can mean one of two things - the company is overvalued, or the market expects them to earn a very high return on equity. I'd say its the later in this case.
I can't comment much on the chart pattern. I'm more of a long term value investor, so I don't have much knowledge of technicals.
The strong dollar will be a headwind, but I maintain that the volume growth in emerging markets should still allow them to overcome it in the long run. The strong dollar is one of the reasons I modeled a sizable drop in revenue for 2015 though.
Hi Chris,
Both are very good questions.
1. I do believe their margins are sustainable, and I do not make that assumption lightly. Normally, tech companies would see their gross margins erode as the technology they charged a premium for becomes obsolete. They may also see their operating margins erode further as they become more R&D intensive to remain competitive. However, Ubiquiti does not differentiate itself using technology - instead they use a unique business model and market segmentation. Plus, their products are already radically cheaper than the competition. Now, I'm only saying margin erosion is unlikely, not impossible, which is why I account for those scenarios in my Monte Carlo simulation.
2. The tax rate isn't low because of any NOL. It's low because UBNT generates most of its revenue overseas, and then spends it overseas. Their manufacturing plants and a good bit of their R&D is overseas. Their main R&D team and management are the only things in the US.
Hi Mingran,
I'm glad you liked my article!
1. That's unit volume. You're right in saying that their revenue share would be much lower. Thanks for asking this question. I'm going to submit an edit to specify this, because a 22.5% share of revenue would be an absurdly optimistic expectation!
2. These numbers came from data that IDC reported and published to Bloomberg. I can't exactly link to it, but if you have a Bloomberg Professional subscription you can look it up yourself.
Hi Seth. Thank you for your comment.
I actually could not find what the exact margin on the soda makers was. Can you share the source for your 25% to 30% figure? All I managed to find was a line that they were sold nearly at cost in the 2012 10k filing.
I have to disagree with your comment on Kitchen Aid. The brand is certainly more popular and has a greater following.
The regular cola may be cheaper than coke or pepsi under certain circumstances. I chose to compare unit costs to 2 liter bottles. The difference is about $.50/liter vs $.75/liter. Then when you add in the cost of CO2 ($.25/liter) the cost becomes the same. Considering you have a $70 minimum fixed cost, it does end up being more expensive. When you sue naturally flavored cola as the basis for this comparison, which is about $2/liter, its clearly more expensive.
I would say that the Galaxy Tab 10.1 was a notable design win
Actually cube, I was replying to familymisc's earlier comment, which quoted you.
I would agree with you to an extent. Bay Trail way by no means a "huge achievement." Anyone that expected it to singlehandedly make Intel a major player in the mobile space had lofty expectations indeed.
However, I would say you're a bit too harsh in your analysis. I see Bay Trail as an impressive step in the right direction from a company with next to no history and experience in mobile. They have a long way to go in terms of LTE radio integration, but they made a power efficient chip that matches, if not beats, its competition in performance.
Manufacturers are moving away from that distinction. Tablets and phones are powered by the same chip much more often these days. The iPad Air and the iPhone 5s, for instance, are powered by the exact same chip.
Trefis is purely a research company.
I strongly encourage you to read articles before you comment on them. As the title suggests, this article aims to offer an objective interpretation of the Q1 sales figures and clear up some misconceptions that investors have. Nothing more. Judging by the other comments, I have been successful in doing so.
I certainly do not have bitter investor syndrome. In fact, I did mention in the first paragraph that the short sellers were incorrect about the company's valuation as well. Do I tell investors to short the stock, or that the company will be unsuccessful at any point? No. I simply tell them to consider the risks, and not to use misinterpretations to justify a share price driven by a short squeeze.
Steve, I did indeed pull that comparison from an older article. However, if you read my article, you will see I did so for the purpose of explaining why such comparisons are incorrect.
I'm waiting for the effects of the short squeeze to wear off, then I will likely buy some as well.
Thank you for your comment. The reservations give us a measurement of interest, not necessarily demand. It is easy to put down a deposit if you are interested in the car, but withdraw it if you ultimately decide not to purchase it. What I would like to know is how many of the reservation holders are going through with their purchase, and how that ratio is changing over time.
Again I am in no way saying that demand for Tesla's products will flat line or fall. All I am saying is that investors should be aware of the risks and hurdles the company faces, and should not extrapolate using incorrect interpretations of Q1 sales data.
In my personal opinion, I think the company will do quite well, but the stock price is well beyond its fair valuation right now.
Actually, Tesla stopped providing reservation data after it weakened in Q1. The reservations/ week would give us a better measurement of interest, not necessarily demand, since the deposit is fully refundable and non binding. Many potential customers are only putting down a reservation to secure their place in case they do decide to buy.
Oh, let me clarify. We actually did receive a call in March to configure our Model S, but we decided to defer the purchase because my dad had some reservations and wanted to look at the upcoming Audi TDI models.
I mentioned that we made a reservation a year ago, and that our place in line was about 10,400 to highlight the fact that these current sales may not reflect current demand at all.
My family is actually considering Audi and Mercedes as well. We actually haven't decided yet though, and have already deferred our reservation once. I personally think its a fantastic car, but my dad needs to travel long distances time to time.
Again, I am not saying that Tesla will be unable to appeal to the mainstream consumer. All I'm saying is that there is some measure of uncertainty to be accounted for. The current sales figures should not be used to estimate the Model S's popularity in the mainstream market as so many are doing.
As for Generation III, I wouldn't put too much weight on that. I think it's a bad idea to extrapolate too far into the future with budding industries such as this.
Great article Ashraf. I think that the strength of the post-earnings rally can be largely attributed to a short squeeze. As I recall, the quantity on loan was very large before the earnings release.
I agree. The term structure is most likely to be in backwardation when the VIX is elevated well above its historical mean. At this point, potential losses from mean reversion do become significant.
If you mean buying calls, I would advise against it unless you have reason to believe that we will see a significant surge in volatility. Front and second month contracts are in contango right now, and VXX will decay due to negative roll yield.
If you mean selling calls, I personally find it too risky. It's very difficult to predict spikes in the VIX. If a black swan event occurs in that time frame the calls you sold will be exercised, leaving you with a rather hefty bill.
I may be wrong but I think it is because XIV is an ETN and SVYX is an ETF. I have yet to see options for for any kind of ETN.
Playing backwardation is considerably more difficult than playing contango. Sustained and significant backwardation only seems to occur when the VIX is elevated well above its historical mean. The problem this poses is that losses from mean reversion can easily overpower positive roll yield from backwardation. As such I would strongly discourage going long on VXX, TVIX or something of the sort for the sole reason that the term structure is in backwardation. You must also be confident that the spot VIX will continue to remain elevated for some time.
Yeah. What a lot of people don't seem to realize is that timing a black swan event is tricky, and in the meantime they will be hammered by roll yield from contango. In situations where black swan events seem likely contango tends to be very steep, unless the VIX is already elevated.