Deep Dive – $UBNT, “From Disgruntled Engineer to Billionaire and NBA Owner”

by Enis November 21, 2013 6:55 am • Commentary

Ubiquiti first came to my attention after reading this Bloomberg Businessweek article about the company’s founder, Robert Pera, back in April of this year.  The whole article is worth a read, but here’s the snapshot of Pera’s and Ubiquiti’s highs and lows since opening for business in 2005:

Pera is one of the most successful entrepreneurs in Silicon Valley. Since starting Ubiquiti eight years ago in a makeshift lab in his San Jose apartment, he has upended the wireless Internet industry. He and the company’s few dozen engineers have found ways to relay signals faster, farther, and cheaper, enabling tens of thousands of small Internet service providers to do business in corners of the globe where cables and wires haven’t reached. “It’s really kind of an insurrection,” says Matthew Robison, an analyst who tracks Ubiquiti for Wunderlich Securities. “Not only the company but the customers that they’re empowering. They’re a new force in the marketplace.”

In a glass-walled office that looks out on teams of engineers and developers, Pera, 35, tells the story of his rise as if it were a series of case studies. There’s the Apple(AAPL) employee just out of engineering school and feeling stymied by a slow-moving corporate culture; the one-man-band scrambling to fill his first order; the breakout success nearly ruined by a counterfeiter; the finance rookie rushed into a private equity deal and an IPO; and the young chief executive officer learning to give investors a story to go with their stock.

Last May, the company’s shares tumbled when the financial press picked up a rumor that Pera had enlisted Chinese mafia to squash competing manufacturers. The story, Ubiquiti now says, had been planted by the alleged ringleader of a counterfeiting operation dumping tens of thousands of knockoff products into the market. By the time Ubiquiti filed a lawsuit against the counterfeiters, its stock had lost almost half its value, falling from a May 1, 2012, price of 35 to less than 19 on May 21. By mid-August, despite Ubiquiti having won a preliminary injunction against the alleged counterfeiters and announcing a $100 million share repurchase, it was below 8.

“Looking back, we weren’t ready for an IPO,” says Pera. “If you’re not built like a fortress and you cannot control your own narrative, you shouldn’t be a public company.” He takes much of the blame. “I was an inexperienced CEO for public markets,” he says. “I didn’t necessarily know about the power of creating your narrative, marketing the story.”

Since that interview in April, UBNT stock has been on a tear, making a new all-time high above $35, which was the prior high in 2012 prior to the counterfeiting issues:

UBNT weekly, Courtesy of Bloomberg
UBNT weekly, Courtesy of Bloomberg

Quite a turnaround, but it’s on a strong fundamental basis.

First, here’s the progression of Ubiquiti’s products from Rob Pera’s initial founding in 2005 (once again, thanks to the Bloomberg Businessweek article), after working as an electrical engineer in the wireless routing division at Apple:  

1.  First orders in the summer of 2005, selling radio wards to small wireless internet service providers in the U.S. to improve the service’s range and signal.

2.  Build’s whole hardware system for wireless ISP’s, called NanoStation, and starts selling in 2008.  It’s an all-in-one unit that ISP’s could install directly in customers’ homes.

3.  Used proprietary scheduling software and new Wi-Fi protocol to build new system called AirMAX, released in August 2009.  AirMAX provides cheap, reliable, and fast WiFi service, and accounted for 47% of total revenues in the most recent quarter.

Ubiquiti was slowed down by the counterfeiting issues in 2011 and 2012.  Management has become more focused on protecting its intellectual property, pouring significant resources into patent enforcement.  Also, Europe and the U.S. make up 70% of revenues, while Asia Pacific and Latin America make up the other 30%.  China and Latin America are the main markets where UBNT has received less protection from the patent authorities.

Despite the counterfeiting hiccup, what’s so impressive about Ubiquiti’s product evolution is how quickly the company moved from component to total hardware system, and then to best total hardware system on the market.  Rob Pera and the Ubiquiti team are clearly fast, nimble competitors in the wireless router market.  The current focus is on growing in the enterprise market, which went from less than 20% of total revenues a year ago to almost 40% of revenues today, and grew almost four fold in the process.

Aside from simple engineering expertise, one of the most appealing aspects of UBNT’s management ethos is its reliance on its Ubiquiti community for word-of-mouth sales, marketing, and product improvement.  The community website is a very active global community of customers who provide frequent, real-time feedback and promote Ubiquiti routers at the same time.  It has allowed UBNT to spend minimally on sales and marketing functions, a major cost advantage as competition has heated up.

The financial statements are terrific.  I have rarely come across a simpler set of financial statements for a nearly $4 billion market cap company.  The management team obviously values simplicity and transparency, with little room for financial gimmicks or earnings smoothing.  The company has grown sales almost 40% in 2013, while earnings have grown over 50%, an impressive demonstration of improving margins for a company growing so quickly.  Sales and earnings are both expected to grow 30% next year.

As for valuation, given the stratospheric valuations of some fast-growing nascent competitors today, UBNT’s 35x P/E is laughably cheap in comparison.  UBNT’s competitive moat, as a hardware provider in a historically tough market, is part of the reason for investor skepticism.  Last year’s scandal doesn’t help.  But Rob Pera and Ubiquiti have shown a clear trend of remaining one step ahead of the competition.

However, UBNT’s competition are no slouches.  Here is its own characterization of its competitors:

As we move into new markets for different types of equipment, our brand may not be as well known as incumbents in those markets. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier, regardless of product performance or features. In the integrated radio market, our competitors include Motorola and Trango, and in the 900MHz product market, Cisco and Proxim. In the embedded radio market, our competitors include Mikrotīkls and Senao. In the backhaul market, our competitors include Ceragon, DragonWave and Mikrotīkls. In the CPE market, our competitors include Mikrotīkls, Ruckus and TP-LINK. In the antenna market, we primarily compete with PCTEL and Radio Waves. In the enterprise WLAN market, we primarily compete with Ruckus, Aruba Networks and Cisco. In the video surveillance market, we primarily compete with Vivotek, Axis Communications and Mobotix. In the microwave backhaul market, we primarily compete with Cambium, DragonWave, SAF Tehnika and Trango. In the machine-to-machine communications market, we primarily compete with EnergyHub, Motorola and

Quite a list for sure.  From what I’ve read though, and more importantly, as evidenced by UBNT’s impressive growth figures, Ubiquiti is oftentimes the preferred supplier on both cost and performance, a rare combination.

Rob Pera’s story is an attractive one, from disgruntled electrical engineer to billionaire and part-owner of the Memphis Grizzlies.  Forget the flash, though – Ubiquiti is the real deal, both as a company and as a stock.  We will be looking for the right entry to add it to our investment portfolio for a longer-term position.