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Why I'm Staying Long On Ubiquiti Networks

|Includes: Ubiquiti Networks, Inc. (UBNT)
Summary

Ubiquiti Networks History

Growing Pains / Product Expansion

Future is Bright

                I have been following Ubiquiti Networks for the last five years and have bought and continue to hold the stock with a belief that the company has been grossly undervalued by most analysts who cover the stock. The company came to my attention in the summer of 2012 when I read an article on ESPN detailing the sale of the Memphis Grizzlies basketball team to Robert Pera the founder and CEO of Ubiquiti Networks. Having never heard of the guy or the company I quickly went online to learn more. My Initial research found only few articles including one from forbes showing that Ubiquiti had gone public in October of 2011 and had made its founder Robert Pera a billionaire. The articles were quite intriguing as I was astonished to learn that the company was the most profitable on a percentage basis of any hardware company including Apple (Robert's former company where he worked after graduating with an MSEE from UC San Diego).

              What was even more curious after a cursory glance of the company's S1 filings was that the company had just 92 employees at the time of the I.P.O while generating 197 million in revenue and had no marketing or sales people. At first I was skeptical of the company thinking this couldn't possibly last especially as the company was beginning its foray in to the enterprise networking space and believed it was only a matter of time before their no touch sales model became a liability. After the company stock fell to $8 and change I decided to initiate a position and buy some shares as albeit a bit skeptically thinking that at that time it had become undervalued. Over the next several years as the company expanded its product portfolio in both the enterprise and operator segments I continued to accumulate more stock especially after I had joined Ubiquiti's online community of users who were in many ways fanatical about the company. I even began using some of there products in an effort to educate myself about the industry.

          Over the years the company has had many growing pains e.g several compatibility issues with their Airmax platform (Now Fixed), Unifi Video e.t.c. In that time the company has been subject to many shorts with at times almost 40% of the company's public shares being shorted. Many skeptics including most analysts covering the stock hold the belief that the company just makes so-so products that over time become commoditized causing slowing growth and lower margins. Since the company went public the company has continued to grow and maintain its high net margins compared to competitors. What many analysts covering the company fail to grasp is just how sticky the Company's platforms (Airmax, Airfiber, Edgemax and Unifi) are. For Instance Most Ubiquiti Wireless ISP providers have an average of 1000 radios deployed in the field, consisting of CPE's, Base Stations, Antennas and the like. In total the company has sold excess of 40 million of these radios since 2010 when they were introduced. To the operators these deployments are a substantial capital investment which is why many of them have stuck with the company through its many fits and starts. Many of them are in developing economies and the idea that they would rip out 1000 radios and replace them with a new vendor is "ludicrous" (verbatim from several WISPS I have talked to in the community). Ubiquiti for their part have been open regarding their short comings and have thus garnered the trust of their operator partners. Secondly the Idea of commoditization is flawed as Ubiquiti low priced strategy makes their products lower than other OEMs. Their CEO revealed this in several analyst calls.

      What has me excited about the company's prospects for the future and why I remain long is its consistency and innovation. Throughout the years and turmoil the company has faced, the fundamental story has not changed. The company has continued to out-innovate its competitors and keep its prices low. To quote Jeff Bezos ("The big Ideas in any business are usually stable in time and you should spend your time investing against these ideas") In Amazon's case their big idea is speed of delivery and low prices and over time they have done exactly that. In Ubiquiti's case there big idea is price/performance of their products. And they have always been consistent in this regard and have only improved with time. Secondly they are aggressively spending on R&D and have products in their pipeline with potentially huge opportunities (LTU, Unifi Video Gen 4, Unified Threat management / Enterprise Security, Internet of Things). In giving the company's FY2018 forecast the CEO did not include these potentially game changing products as part of the forecast only saying they would be icing on the cake. Furthermore the company has always been conservative with guidance and almost always beats their forecast high. I have made quite a killing on this name for the past five years by being long and believe the best is yet to come. Stay Long my friends, Stay Long.

Cheers,

Brian

Disclosure: I am/we are long UBNT.