Value Line has initiated coverage of Ubiquiti Networks, Inc. (UBNT) in its flagship product, The Value Line Investment Survey. The company develops high performance networking technology for service providers and enterprises. The service provider product platforms offer carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems, and routing. The enterprise platforms provide wireless LAN infrastructure, video surveillance products, and machine-to-machine communications components. Ubiquiti is headquartered in San Jose, California and employs 183 worldwide. Its stock began trading on the NASDAQ exchange on October 14, 2011.
In recent years, Internet traffic worldwide has grown rapidly, driven by an increase in the number of users, more mobility of those users, and high bandwidth applications, such as video, audio, and gaming. And, according to industry reports, global Internet protocol (IP) traffic is expected to increase at a compound annual growth rate of almost 30% from 2011 to 2016. Traditionally, wired network solutions have been used to address consumer and enterprise bandwidth needs. The high initial capital requirements, ongoing operating costs, and long market lead times associated with building and installing the infrastructure, however, has severely limited the widespread deployment of these networks in underserved and underpenetrated markets. Further, existing solutions based on wired, satellite, or cellular technologies, often fail to meet the price-performance requirements of fixed wireless networking in emerging markets, rural markets, or price-sensitive markets, which in turn has led to low penetration of wireless broadband access and large populations of unaddressed users in these areas. Thus, wireless networks are emerging as an attractive alternative for addressing both the broadband access needs of underserved and underpenetrated markets in both emerging and developed countries.
This brings us to Ubiquiti Networks, whose products and solutions enable both service providers and enterprises to deploy cost-effective infrastructure for high-performance, scalable, and reliable wireless networks. Indeed, its differentiated business model, combined with its proprietary technologies, has resulted in an attractive alternative to traditional high-touch, high-cost providers, allowing the company to advance the market adoption of its platforms.
The company’s business model is driven by a large, growing, and highly engaged community of service providers, distributors, value added resellers, systems operators, and corporate IT professionals, which Ubiquiti refers to as its “Community.” This community enables it to drive rapid product development, have a scalable sales and marketing model, and self-sustaining product support. By reducing the cost of development, sales, marketing, and support, the company is able to eliminate inefficiencies and offer its solutions at lower prices for consumers.
Ubiquiti’s primary goal is to disrupt the market for communications technology with innovative solutions that provide leading performance at prices that are a fraction of those of alternatives. Key elements of its strategy include delivering high performance characteristics at low prices, leveraging its technologies and business model in adjacent markets, maintaining and extending its technology leadership, continuing to grow its user community, and selling to existing customers through cross-selling opportunities. At this time, adjacent markets include video surveillance, machine-to-machine communications, and licensed microwave wireless backhaul markets.
That said, the markets for networking solutions for service providers, enterprise WLAN, video surveillance, microwave backhaul and machine-to-machine communications technology are highly competitive. These markets are mainly influenced by price, ease of use, technology innovation, and reliability of solutions, among others. In general, Ubiquiti competes favorably with respect to these factors, even in its newly entered markets. While no other company competes in all of the same markets as Ubiquiti, some competitors include Motorola Solutions (MSI), Cisco Systems (CSCO - Free Cisco Stock Report), Proxim (PRXM), Ceragon Networks (CRNT), DragonWave (DRWI), Ruckus Wireless (RKUS), and Aruba Networks (ARUN).
Due to rapid technological changes, competition may well intensify in the future. It is possible that other established, or new companies, introduce products in the same markets as Ubiquiti, or those it intends to enter, as these markets continue to consolidate. In particular, companies with successful, widely known brands may price their products aggressively to compete with Ubiquiti’s low-priced solutions. In such case, the pricing pressure could lead to reduced profit margins and could pose a threat to the company’s market share. Consequently, research and development, which consists of 6.5% of sales, will be important for Ubiquiti.
Additionally, as a result of the company’s offerings serving underserved and underpenetrated markets, a substantial portion of revenues are generated overseas. Indeed, international sales represented 75%, 76%, and 70% of revenues over the past three fiscal years (periods end June 30th). Foreign sales are mostly concentrated in Europe, the Middle East, and Africa (EMEA) (40%, 37%, and 35% in fiscal 2013, 2012, and 2011, respectively) and South America (21%, 25%, and 26%). Investors should be aware of the numerous risks involved with conducting business in these markets.
For a more thorough look at Ubiquiti, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey, as well as any supplemental reports and relevant articles as important news items arise.
At the time of this article’s writing, the author did not have positions in any of the stocks mentioned.