2023-07-24 18:20:00 ET
Summary
- Ubiquiti, a networking infrastructure company, has seen consistent revenue growth since its inception in 2003.
- The company's valuation suggests that moderate growth should continue into the future.
- As Ubiquiti's comparison numbers soften from Covid-related temporary highs, the company could see an accelerated growth rate that's higher than analysts currently expect.
- I have the stock's rating as hold, with the potential for a buy rating if revenues or margins grow faster than currently expected.
Ubiquiti ( UI ) is a company that manufactures and sells networking infrastructure to companies with their platform offering of UISP and UniFi. Ubiquity has grown its revenues throughout the company’s history, beginning in 2003. At $183.37 I believe the stock is currently quite correctly priced, which is why I have a hold-rating for the stock.
The Company
Ubiquiti offers WiFi infrastructure solutions through UniFi. The company’s offering includes network routing software, video surveillance programs, products that minimize a network’s signal noise, and other network management systems:
The company experienced a sharp rise in demand as Covid largely increased network usage globally – revenue growth was an impressive 48% in FY21 , which was followed with a cooldown of -11% in FY22. Ubiquiti has returned to a growth path as their revenues have again grown for a few quarters.
I believe Ubiquiti’s investor relations department is very lacking, as the company doesn’t communicate with the capital markets very well in my opinion; the company’s last shareholder call was held in December of 2021, and the company doesn’t update investors with any new presentations. The company’s quarterly results are also reported in a very limited fashion, as they don’t seem to have any comments from the board, or give an outlook for investors.
Financials
Ubiquiti has had an impressive history of growth, as the company’s revenues have grown at a compounded rate of around 36.2%:
Growth in revenues is expected to continue, as analysts expect a 14% growth going forward according to Tikr’s data. I believe this could also be a chance to positively surprise analysts – growth has been slow for some quarters due to strong comparison numbers that related to a temporary Covid boost. As the comparison numbers shouldn’t have such a temporary boost in the future, the company’s growth rate could pick up again in a more sustainable fashion. The company’s latest quarter saw growth of almost 28%, supporting this thesis.
Ubiquiti has maintained a very healthy operating margin, that has constantly been well above 20%. The company’s management is very cost conscious, as the company doesn’t invest extensively – in FY22 the company’s capital expenditures were only around $13.5 million , a low number compared to many other IT companies. The company has historically had margins well above 30% too – in FY22 the margin dropped as Ubiquiti’s gross margin dropped from 48 percent into a little below 40 in the year.
A look into Ubiquiti’s balance sheet reveals that the company holds around $1,088 million in debt , and a cash balance of $153 million. This is a healthy level, as Ubiquiti should generate operating profits the size of their debt in around two years. The company has done a good amount of share buybacks, and I believe it has a healthy balance sheet and cash flows to continue to be healthy in the short to medium term.
Valuation
With trailing figures, the company’s price-to-earnings ratio stands at 28, a number that in my opinion prices in a good amount of growth. As usual, I constructed a discounted cash flow model to further illustrate the company’s current valuation.
Although the company could see greater growth than currently forecasted, I believe numbers that are close to consensus estimates should be the base case for my model – my model has a growth of 14.3% for FY23, and 16% for FY24 that slowly fades away into a growth of 2.5% in perpetual growth. The forecasts also expect Ubiquiti’s margins to grow slightly as years go on, as the company realizes benefits from scale and grows back into margins that the company had some years ago. With these expectations, we get an estimated value of $179.31 for the stock, very close to the stock’s current price:
The used cost of capital of 10.53% is derived from a capital asset pricing model for the company:
CAPM of Ubiquiti (Author's Calculation)
Ubiquiti’s interest costs in Q3/FY23 were $16.5 million. With an outstanding debt balance of around $1088 million, this corresponds to a 6.07% interest rate. The company uses a healthy amount of debt, so I’m inputting a desired debt-to-equity ratio of twenty percent.
The used risk-free rate is the United States’ 10-year bond yield . The estimate for the stock market’s equity risk premium is 5.91%, an estimate that is taken from Professor Aswath Damodaran’s latest estimates . Tikr estimates the stock’s beta to be 1.27. Finally, a liquidity premium of 0.75% is in my opinion justified for the stock, crafting a cost of equity of 12.02% and a WACC of 10.53% that was used in the DCF model.
Closing Remarks
If the company’s revenues or margins grow faster than currently expected, I believe the stock could deserve a buy rating. This could very possibly happen as the company’s comparison numbers are soften than they have been for the past quarters. We have seen signs of improving growth, with Q3/FY23’s growth being almost 28%, but I would need to see one or two more quarters with such growth to start pricing bigger growth levels into the stock. If next quarters blow out analysts’ expectations, I would probably turn my rating into buy , but for the time being, I have a rating of hold for the stock.
For further details see:
Ubiquiti's Growth Should Continue