2023-11-08 21:11:59 ET
Summary
- Ubiquiti's Q1/FY2024 results were a negative surprise because of weak revenues, causing the stock price to fall by -15%.
- As the industry seems to be facing a challenging macro environment, I believe that Ubiquiti's long-term story should still stand despite current weakness.
- My DCF model estimates a higher upside than in the previous write-up, but I don't believe the upside is significant enough for a buy rating.
Ubiquiti ( UI ) recently reported its Q1/FY2024 results. The company’s results came as a negative surprise to investors as the stock price fell by -15%. Moreover, the stock has been on a constant fall after my previous write-up made in July. As both the financials and the stock price have fallen from my previous analysis, the risk-to-reward seems to stay at near the same as before when comparing the DCF model estimates.
Recent Stock Performance
After my previous write-up in July, Ubiquiti’s stock price has fallen significantly from $183.37 a share into a price of $110.19 at the time of writing:
Year-to-Date Stock Chart (Seeking Alpha)
The stock recently dropped down by almost -15% on the 3 rd of November as Ubiquiti reported its most recent quarterly results. The drop happened with a large volume, as almost 474 thousand shares traded in the day compared to a usual volume of below 100 thousand. Since, the stock has recovered slightly from the drop but continues trading at a level that’s significantly below the pre-result price.
Reported Q1/FY2024 Results
On the 3 rd of November, Ubiquiti reported its Q1/FY2024 quarterly results. The results were a negative surprise for investors as the stock reacted very negatively. Compared to previous quarters, Ubiquiti’s growth saw a significant drop – in Q4/FY2023, Ubiquiti’s revenues grew by 10.8%, but in Q1, the revenues decreased by -7.0%.
Even though the revenues came in at a weak figure, Ubiquiti’s profitability was very good. The company had an EBIT margin of 27.7% in the quarter, above the previous year’s margin of 24.5% - the wider margin resulted in an EBIT figure growth year-over-year despite falling revenues. The market seems to factor the weak revenues more than the strong margin as the stock price reacted negatively; a halt in the company’s long-term growth story would be detrimental to the stock price.
As Ubiquiti’s investor relations are very limited, investors are left wondering about the company’s recent weakness’ drivers and the company’s future outlook. The company did relate the weak revenues to a poor performance in the Enterprise Technology platform segment, and commented that Service Provider Technology platform segment’s revenues increased year-over-year. Ubiquiti’s competitor, Juniper Networks, had near a similar amount of weakness in the same period, though – for Juniper, revenues decreased by -1.2% in the same period compared to a previous quarter growth of 12.6%, relating the weakness into a challenging macro environment in the company’s Q3 earnings call . As it seems that the weakness is largely related to a challenging period in the entire industry, I believe that the most recent quarter doesn’t extrapolate very well into the long term. Although Ubiquiti will probably face a few tough quarters, the company’s long-term growth story should continue.
Valuation
As both the stock price and Ubiquiti’s financial profile have changed since my last analysis, my DCF model estimates and upside also change with the previous factors. I have changed my revenue and margin outlooks as well as updated the cost of capital to the current environment.
The revenue outlook for FY2024 has weakened severely from my previous write-up in my opinion. In the previous DCF model, I estimated revenues of $2243 million for the year compared to a figure of $1999 million and a growth of 3% that I now see as a reasonable expectation. I believe that the weak revenues can be extrapolated for some quarters forward, although the macro environment should start to improve at some point. Going beyond the weak macro environment, I still have lower growth estimates compared to the previous write-up – for FY2032, I estimate revenues of $3852 million, compared to a previous estimate of $4536 million. In total, the current model estimates a revenue CAGR of 7.9% from FY2023 to FY2032 as opposed to a previous estimate of 9.9% in the same period.
Although I estimate lower revenues for Ubiquiti, I have kept the margin estimates quite stable as the most recent quarter showed strong year-over-year margins. For FY2024, I estimate an EBIT margin of 30.4% compared to a previous estimate of 29.5%. Still the long-term margin stays the same with an estimate of 33.9% for FY2032 in both the current and the previous DCF model. The mentioned estimates along with a cost of capital of 11.90% craft the following DCF model with a fair value estimate of $128.78, lower than the previous estimate of $179.31:
DCF Model (Author's Calculation)
The used weighed average cost of capital of 11.90% is derived from a capital asset pricing model:
CAPM (Author's Calculation)
In Q1, Ubiquiti had $21.2 million in interest expenses. With the company’s current amount of interest-bearing debt , the company’s annualized interest rate comes up to a figure of 8.13%. The interest rate has gone up from my previous write-up’s level of 6.07% as overall interest rates have gone up since the previous analysis. Ubiquiti’s debt has lowered slightly from my previous valuation – I estimate the company’s long-term debt-to-equity ratio to be 15%, compared to my previous estimate of 20%.
On the cost of equity side, I use the United States’ 10-year bond yield of 4.54% as the risk-free rate. The interest rate has gone up as in the previous analysis the interest rate was 3.77%. I still use the same equity risk premium of 5.91%, being Professor Aswath Damodaran’s latest estimate for the United States, made in July. Yahoo Finance estimates Ubiquiti’s beta at a figure of 1.35 , very slightly above the previous figure of 1.27. I believe that my previous liquidity premium of 0.75% is a bit on the high side, and I lower it into 0.4% in the current analysis. Still, the WACC comes in higher than in the previous write-up – the WACC is now 11.90% compared to a previous figure of 10.53%.
Closing Remarks
After my previous write-up, Ubiquiti’s stock price has fallen very significantly. Yet, my rating stays the same – although the DCF model does estimate a moderate upside for the stock compared to a very slight downside in the previous write-up, I don’t believe that the upside is high enough to constitute a buy rating. Ubiquiti’s long-term growth story should still stand, but for the time being I am on the sidelines waiting for weak upcoming quarters; I keep my hold rating for the stock.
For further details see:
Ubiquiti: Weak Quarters Shouldn't Undermine Long-Term Story