Description

I like investing in companies where it’s basically an accident that they are public in the first place. Such is the case with Ubiquiti. 

Ubiquiti is an $8 billion company with effectively no sell-side coverage or buy-side interest. They don’t have quarterly earnings calls and investor relations doesn’t exist. There have been numerous short seller reports on the company, which has admittedly had some rocky periods in the past. No one of note owns it and the company’s name is barely mentioned in reports on the networking space or pitched by funds. And yet, it’s got to be one of the most remarkable success stories in the last 10-15 years. 

Ubiquiti has two business segments: service provider and networking equipment. The service provider segment is the legacy side of the business where they make equipment for wireless internet service providers (WISP’s). It’s basically radios and antennas and other equipment for local internet providers that operate wireless networks rather than typical ones built on fiber. WISP’s are a niche industry that tend to serve areas that aren’t penetrated by dense fiber, such as rural areas and emerging markets. Ubiquiti is the market leader in the space by a wide margin, and the existence of WISP’s is almost solely attributable to Ubiquiti for lowering the costs so much and making WISP’s businesses viable. WISP’s have matured considerably and for the time being there isn’t much growth. Ubiquiti is generating about $450 million in revenues from the service provider segment and I think it will probably only grow low single-digit over time. 

The second segment is networking equipment which is mostly driven by the UniFi product line which was launched in 2010. The UniFi lineup includes things like routers, switches, access points, and an increasing number of devices which attach to a network such as security cameras. Ubiquiti’s strategy has been to expand networking products adjacently into security cameras and other things that attach to networks. UniFi is generating about $900 million in revenue with industry-leading margins and they are taking large amounts of market share in gigantic market. It’s hard to say what the TAM is for the networking world given the various ways to segment it (eg Ubiquiti doesn’t compete in the data center market) but for now I’m fine saying that Ubiquiti is still a small player in a very large space. Previous calls for the TAM to be reached have always been wrong. Ubiquiti’s products are slowly taking over the consumer, prosumer, small enterprise, and medium enterprise spaces as it delivers by far the best bang for the buck. It will be interesting to see if UniFi continues to move up market into large enterprise (likely) and data centers (unlikely). Customers rave about the low cost and great functionality and reliability of the products, which is validated in the historical revenues if nothing else. In both lines, Ubiquiti operates differently than most networking equipment companies. 

Ubiquiti sells products either direct to consumers or through distributors, they do not employ a sales force like every other networking equipment company. Pera’s belief is that sales departments are really more like spin departments and there is enough information dissemination that customers generally know which products are best. 

Ubiquiti has limited support options and mostly relies on its online community for product help. While many people have laughed at this, most IT people actually love this approach, in part because Ubiquiti’s engineers are active in the message boards. At no other company can the customers interface directly with the engineers – customers feel better about this and engineers take more ownership over products and have more visibility into what areas to innovate. They do offer a paid tier of support for large customers.

Ubiquiti’s products don’t have features that are viewed as seldom used and only exist for marketing. They are also disaggregated more as single-purpose devices that only need to do one thing really well. This allows engineers to more easily maximize performance while giving customers more options in building their networks optimally and at the lowest cost. 

Ubiquiti has no software licensing fees. They take the Apple approach and provide an integrated solution and their hardware only runs on their software. Customers hate contracts and licensing fees.

Combined, these and other differences lower the cost structure tremendously while still being able to put out high quality and innovative products that customers love. While there is nothing Ubiquiti sells that is explicitly recurring in nature, networks always expand and get upgraded and customers are locked-in with Ubiquiti equipment. The tailwind of connectivity only grows and I haven’t seen anything in the industry or in the competitive landscape to concern me. Over time, I think you will see Ubiquiti become more consumer oriented as well as more software oriented.

Ubiquiti’s founder, Robert Pera, owns 88% of the company. He is the driving force of Ubiquiti and the company has a mountain of key-man risk. While he’s often described as strange, I think nicer way to put it is that he is unconventional in how he has structured the company and how he interacts with other people. He has almost never sold stock and he’s never taken any form of compensation. He founded Ubiquiti in 2005 with $30,000 he made from selling shares of Apple, where he first worked out of college as an engineer in the group that made Apple’s wifi equipment. Pera went to Apple in 2000 because he admired Steve Jobs so much…I would note this pre-dated the iPod. Pera has expressed his admiration for Jobs on numerous occasions and the similarities between the two are eerie, some of it circumstantial, some of it Pera modeling Ubiquiti on certain aspects of Apple. Pera is an obsessive product guy who started out as a 20-something in a garage and has been able to scale to a multi-billion company in a short amount of time. He has a knack for product innovation and critically important, he’s proven himself to not be a one-trick pony. He has a commitment to his principles and vision, and he’s maintained a long-term focus throughout challenging period. He’s honest (often brutally so) and thoughtful.

Ubiquiti’s culture is truly unique. Engineers run the company, something that attracts other top engineers. Organizationally it’s a flat structure where people aren’t big on job titles, middle management, or all the typical trappings of the corporate world. It’s a fiercely entrepreneurial atmosphere where engineers and developers are expected to solve problems and invent things and are given the resources to do this. Pera is deeply involved with product development and engineers often work closely with him. Employees have ownership over products and are given the ability to make a real impact on the company. I think this point is critically important: what Pera has done is create a culture that attracts the best engineers and developers. This tends to be a self-selecting group as Steve Jobs noted by saying how “A’s only want to work with other A’s. B’s want to work with C’s. C’s want to work with D’s, etc.” Ubiquiti is the type of environment that the best people want to work in. Combining this with Jobs’ other great observation that the best people aren’t twice as good but ten times as good, and you basically have the blueprint for Apple’s success.  

There have been numerous short reports on Ubiquiti. At this point I’m baffled why anyone would be short Ubiquiti as every point in the old short thesis has either been disproven or remedied by the company. I’ll skip the point-by-point in the writeup but I will gladly discuss specifics in the Q&A. A glance at the stock chart should give you an idea on how accurate the shorts have been. Short arguments now revolve around more mundane topics like growth deceleration. Shorting Ubiquiti feels to me like owning Gamestop.

Today, I estimate you are paying about 16x forward P/E (June FYE) which strikes me as an extremely attractive multiple for a company in this position. The company’s model allows most of earnings to convert to free cash flow, and Pera has an insanely good track record of capital allocation. Meanwhile, Ubiquiti will probably keep growing at 10-25% for a number of years, albeit with very lumpy growth. The company also expects upwards of 500 bps of margin of expansion from tariff removal. The stock is also now at the last level where Pera was buying back stock and I expect him to hit 90% ownership soon. After that it will be interesting to see the return policy...I expect more dividends but I also expect the buybacks will have to come out of his shares and he will roughly maintain a 90/10 ownership split. He has a long history of treating minority shareholders well. 

When I look at the landscape of ~$10 billion companies and ask myself which ones have the best chance of becoming $100 billion companies, Ubiquiti ranks at the top of the list, all of the inputs are there. I don’t know exactly what this company will look like in a few years but I’m encouraged that there will be another leg to the stool – innovative companies aren’t static. I have no idea why someone wouldn't want to allocate some money to Pera given the chance. 

Catalyst

Value without a catalyst