NTGR - Ubiquiti: Competitive Threats And Chinese Competition - Avoid

2023-12-11 04:22:41 ET

Summary

• Ubiquiti specializes in manufacturing and selling wireless data communication and wired products for enterprises and homes.
• Their products offer high-performance networking technology at a disruptive price point, making them popular among small to medium-sized businesses and tech enthusiasts.
• Ubiquiti faces competition from companies like Cisco Systems, Netgear, and Aruba Networks, but their products stand out for their high data speeds and lower price point.
• Declining margins, a worsening balance sheet, and commoditized products make this a sell. Wait to see if the company launches integrated software products to boost margins.

Ubiquiti ( UI ) is a technology company that specializes in manufacturing and selling wireless data communication and wired products for enterprises and homes. It was founded in 2005 by Robert Pera.

Robert has served as its Chief Executive Officer since the company's inception. Additionally, Pera has been the Chairman of the Board since December 2012.

Their product line includes:

• wireless and wired networking devices
• including routers
• switches
• access points
• security cameras.

Ubiquiti is known for offering high-performance networking technology at a disruptive price point, making it popular among small to medium-sized businesses and tech enthusiasts. Their products are widely used for building internet infrastructure and networks in both developed and developing regions.

Ubiquiti competes with several companies in the networking equipment market. Its main competitors include Cisco Systems ( CSCO ), the giant known for its wide range of networking and telecommunications equipment; Netgear ( NTGR ), offering networking hardware for consumers, businesses, and service providers; and Aruba Networks (a Hewlett Packard Enterprise ( HPE ) company), specializing in wireless networking solutions, amongst others.

Ubiquiti's products are noted for offering high data speeds, extensive network coverage, and robust performance, often at a lower price point. This makes them particularly appealing for applications that require high-performance networking without the high costs typically associated with enterprise-level equipment.

Higher Data Throughput at Affordable Prices

Data throughput for Ubiquiti's networking equipment is typically measured in megabits or gigabits per second (Mbps or Gbps). This measures the amount of data that can be transmitted over the network in a given time period.

Ubiquiti's best-selling products tend to be within their UniFi line, particularly their wireless access points (like the UniFi AC Pro or NanoHD) and UniFi Security Gateway routers. These products are known for offering robust performance and enterprise-level features at a competitive price point.

The UniFi Express is a new offering from the company that is a standalone router and firewall with a built in Wi-Fi 6 access point. It also has UniFi OS and UniFi network built in. This basically means you don't need a cloud key or UniFi controller for UniFi Express (ie it is its own controller).

The versatility of the UniFi express is impressive and it could make it a very popular option for home users and small businesses. And for people that travel a lot or work from outside the home, you can pair it with a 5G or LTE internet connection and use it in your RV or road car.

Ubiquiti vs. Cisco

Back in 2017, the CEO was asked about how they will be able to compete with Cisco at their Investor Day . His answer was compelling.

Our challenge is how do we get more people to learn about UniFi? There's so many young people out of school investing tens of thousands of dollars into archaic Cisco -type proprietary user interfaces to try to go into the IT industry. That should not exist.

UniFi has so much more value in getting these guys up to speed, giving them, in my opinion, better features and better performance and a much more efficient path to becoming successful IT integrators, entrepreneurs or even inside companies.

I think if UniFi gets to the point where every single IT person on the planet deploying Cisco knows UniFi exists, and most customers who are paying for network installations knows UniFi exists, then I don't think they'll be able to block it. So our job is to accelerate customer awareness.

By offering a better product overall, UI has captured a lot of market share. But the competition is stiff and CSCO has significantly more resources than UI, albeit UI is definitely more focused.

Financials

In 2017 Ubiquiti was doing $860 Million in revenues and they now do $1.94 Billion in 2023. Their growth has been strong; however, the company is experiencing declining margins and their balance sheet has gotten worse.

Gross margins have declined from 46 to 48% in 2018-2020 all the way down to 39.7% in Q3 2023. A fear I have about this industry is the commoditized nature of its products. Cisco is a major threat to Ubiquiti and operates at significantly higher margins of mid to high 60% because it has software offerings that raise its overall margins.

On top of the threat from Cisco, you have Chinese competitors dumping products in the US market. On its most recent call, UI mentioned this:

However, our profitability has been negatively impacted due to the continued margin pressures resulting from Chinese competitors dumping import volumes due to weak demand in their local market, which is causing us to stay at lower pricing levels.

Source: November 2023 Earnings Call

Cash and cash equivalents has dropped $308M to $108M since 2019 to fund inventory, which has ballooned from $264M to $706M.

Meanwhile, long term debt has also ballooned from $464M to $1.01 Billion over the same time frame.

Since 2019, the company has done $2.0 Billion worth of buybacks, most of which were done at higher prices than the current stock price.

Essentially, the company has repurchased shares at higher prices and funded repurchases and purchases of inventory with debt, while depleting its cash balances. Inventory will be sold off to generate cash over time so the balance sheet should swing back to higher cash, but they will need to continue investing in more inventory.

Conclusion

I don't like the business that UI operates in. There are competitive threats from everywhere, many of which are larger players like Cisco. Additionally, Chinese competition is dumping products on Ubiquiti's market, causing margins to decline.

To me this is a cyclical business and potentially worse. At $8 Billion market cap, roughly 20X earnings, and sales declining in its latest quarter, it doesn't strike me as a low risk investment.

If the company can successfully move into higher margin software products, I would be more interested in it. While its most recent product launch, the UniFi Express, looks excellent, I worry about competitive threats causing margins to continue to erode. This is what happened with Netgear over the years.

For now, I would avoid UI.

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