Ubiquiti: Share Buybacks Could Continue Stable Double-Digit Annual Returns

Summary

• Ubiquiti has a strong growth track record and uses profits to buy back shares.
• The company is priced for solid returns going forward, even with multiple contractions and slowing growth.
• The current valuation is reasonable and leads me to place a slightly bullish rating on the stock.

Ubiquiti (NYSE:UI) sells wireless data communication products and solutions. This includes many products ranging from WiFi routers to cameras to antennas. The company's full product list is available here. The company competes on many of these products with the much larger giant Cisco (CSCO), as well as a few other smaller players. Ubiquiti recently released fiscal Q3 2020 results that put up an impressive beat. GAAP EPS of $1.60 beat by $0.26, while record quarterly revenue of $337.4M beat by $27.08M. My model below illustrates further possible upside in the company with reasonably forecasted annual returns of between 6.4% and 19% over the next five years.

The stock has a volatile history, especially recently, but those that have held on have been rewarded. The stock has managed to put up very impressive returns, increasing in price several times over during the last 5-10 years.

Data by YCharts

Going forward the company is expected to bring in nearly $1.3B in revenue by the end of fiscal 2020 (which ends in June) and earn around 380M in net income for the year. 2021 expectations currently have the company growing both sales and net income by around 7%.

Source: TIKR.com

Data by YCharts

Data by YCharts

Ubiquiti has aggressively bought back shares over the last few years, reducing shares outstanding from around 90 million to just over 60 million. This along with sales and earnings growth have increased EPS considerably, leading to a strong stock price performance. I expect share buybacks to continue, along with an increasing dividend as CEO Robert Pera owns a large majority of the company and takes no salary or bonuses.

Valuation And Future Returns

In an attempt to estimate what sort of returns an investor may make buying Ubiquiti today, I have created the model below.

The first section of the model in blue forecasts the income statement, EPS, and shares outstanding of the company. I have used revenue and earnings growth close to analyst expectations (although analysts right now have 2022 decreasing in revenue, I maintained growth throughout). I am also assuming here that the company is able to buy back 5 million shares per year. The bottom 2 sections of my model show where the stock could trade based on a multiple of that year's EPS or sales number. For example, if the company earns $9.13 of EPS in 2023 as I have forecasted and trades for 25 times that year's earnings, the stock will trade at $266.38. Currently Ubiquiti trades for around 31 times my forecasted 2020 EPS number. Historically, Ubiquity has generally traded somewhere between 20 and 35 times earnings, and 6 to 8 times sales, thus these are the range of multiples I have selected for this analysis. The colours simply represent when the stock has been cheap (green) or expensive in the past (red). There is always the possibility that the stock trades outside this range, but this range seems very reasonable to me.

I then calculated the forward returns an investor would earn had they bought at Friday's closing price of $184.41 per share (year 0 below is 2020). As one can see, an investor would earn an annual compound return of 7.38% if the stock traded at 25 times 2023 EPS in 2023 if they bought today at $184.41.

By 2025 investors can reasonably expect returns from today's prices as low as 6.4% and as high as 19% based on my forecasts. This gives the company a solid chance at beating the market overall. In fact, even if the multiple contracts to around 25 over the next 5 years, the stock should put up a respectable double-digit percentage return if my forecasts prove to be accurate (which they may very well not).

Conclusion

By no means should investors depend on my model entirely for their investing decisions. My model's forecasts could be off significantly. Perhaps the company returns to 20%+ top line growth as it has in the past. This would push my forecasts way up and investor returns would likely be significantly greater than my model suggests. On the other end, if the company fails to grow and possibly sees some revenue declines, my model and numbers will likely greatly overstate investor returns. Thus investors should examine this model with caution and perhaps apply their own income statement forecasts to a similar model (feel free to message me for details on how I created the model in Excel).

That said, I believe my model is well within reason, and if anything, I think the forecasts may be conservative. This is a company that has grown much faster at times and still has a relatively large TAM. This makes me slightly bullish on the company from current prices.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.