Bull of the Day: Ubiquiti Networks (UBNT) - Bull of the Day

Ubiquiti Networks (UBNT) was one of the best technology hardware stories of the past year, with the stock climbing over 300% from $13 in April of last year to its recent March highs above $55. Our own Brian Bolan picked this wireless broadband innovator for the Home Run Portfolio last June under $17.

But the good times were recently interrupted, first by the spring "tech-wreck" and then by a company earnings report that was not well-received by some analysts who were scared off when they got a big inventory build instead of another big raise in guidance.

Ubiquiti specializes in wireless broadband communication platforms at attractive price points for underserved and underpenetrated markets across the globe. Their key products include radios, antennas, management tools and other network applications in the unlicensed radio frequency spectrum.

Last week's quarterly report delivered another earnings and revenue beat but 2014 guidance was viewed as barely above consensus by one house who downgraded shares to Neutral and lowered their price target from $48 to $41. That analyst action accelerated the stock drop and resulted in a 24% haircut on Friday on big volume of 10 million shares.

The Inventory Question

There was also concern among analysts about the rapid climb in inventories over the past few quarters, with a doubling of equipment on the shelves from $33 million to $66 million in the recent quarter. In Tech land, that kind of inventory build paints a couple of potentially-troubling warning signs to investors: demand problems which foreshadow a sales decline and eventually threaten margins.

But some key facts highlight the specific nature of the trend for Ubiquiti. First, the company decided to significantly increase inventory following an analysis of supply chain data over the past year which indicated they had lost sales as a result of stock-outs. Second, the launch of a new product, AirFiber5, at the end of the quarter also contributed $10M to inventories.

Brian went over the report in detail, read the analyst research, and listened to the conference call. He found management to be very confident in their strategy, noting that the buildup was caused by lead times in shipping and a product build for second half launches. The CEO characterized the company as a volume play which had only just begun to take market share as they service a space that competitors can't or won't.

Then on Tuesday of this week, Raymond James analysts put out a research report upgrading Ubiquiti shares from Outperform to Strong Buy and reiterating their $50 price target.

The RJ team said the sell-off after earnings was "unwarranted" and created a compelling entry point since Ubiquiti's "20%+ growth is sustainable for some time" due to the growth in global demand for their products. Directly addressing the inventory and margin questions, they had this to say...

"First, the company has by far the lowest price points across its product lines, so pricing pressure should be minimal. Second, it is hiring engineers largely in emerging markets making significant margin dilution from R&D hiring unlikely."

The Growth Trajectory

Since Ubiquiti is back to being a Zacks #1 Rank again, it's always helpful to picture the earnings growth story with a look at the estimate revision trends. Here's the Price & Consensus chart which shows the stock following last year's rapid estimate rise and then overreacting this year to estimates leveling off...

The Global Opportunity

As the low-cost provider, Ubiquiti seems primed to capitalize on the demand for wireless solutions in Emerging Markets. Here's what analysts at Macquarie had to say after they reiterated their Outperform rating and lowered their price target from $65 to $55 as they assign a lower target multiple to the stock of 25X...

"We are impressed by Ubiquiti's continued strong execution as it continues to leverage its disruptive pricing based unique business model to expand its footprint across the globe. We do not view the higher inventory and higher operating expense as negative to the long-term story, and believe these incremental investments are positive longer-term."

The Technology sector offers some of the best growth and valuations in a global economy that is building positive momentum. And finding the small and mid-cap companies that are capitalizing on those trends with real top and bottom line growth is essential to outstanding portfolio performance.

My view is that UBNT is one to accumulate while it's on sale in the low $30s.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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