10/01/2016

Quarterly Focus Buy List, HOT Stocks to Buy This Summer!

HOT Stocks to Buy This Summer!

Quaterly Focus Buy List

So our Quarterly Buy List is out and we have some “Hot Stocks to Buy this Summer!

The objective of Quarterly buy list is to highlight 5-7 buy ideas we find most compelling for the near term future.  These as stocks that we are undervalued and have near term catalyst.

What is Unique:
The near term catalyst must be clearly identified for each recommendation, and the recommendations must have very attractive valuations.

Universe:
Market capitalization should be greater than $1 billion in general, but we will focus on recommending names with market capitalization greater than $2 billion.

Name: Ubiquiti Networks, Inc. (UBNT)
Price $9.544
Intrinsic Value Target Price: $49.07
Upside: 39.20%

In this article we will highlight UBNT of 6 our six Focus Buy List Stocks.ubiquiti-logo-630Overview:

Ubiquiti Networks, Inc., develops high performance networking technology for service providers and enterprises. The Company’s technology platforms for service providers enable carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing. The Company’s technology platforms for enterprises enable wirelesslocal area network (WLAN) infrastructure, video surveillance products, and machine-to-machine communications. The Company offers products and solutions based on its proprietary technology with disruptive price-performance characteristics across multiple markets. We like UBNT for the following reasons:

Enterprise Technology Segment Generating Robust Growth:

This group of products includes wifi-related devices (mainly a variety of enterprise routers), video cameras, VoIP phones, network switching/routing devices and accessories.These products have historically been marketed towards small businesses. However, a growing number of customers havepurchased UBNT’s enterprise wifi routers for home use. The Enterprise Technology segment is a rapidly growing part of UBNT’s business. Over the first 9 months of FY 2016, sales from the division grew 25% over the same time period from the previous year. In the most recent quarter, Enterprise Technology represented 42% of total revenues. Although sales in UBNT’s other major segment, Service Provider Technologies, are stagnant, the acceleration in Enterprise Technology hasfueled overall growth in the current year and is a target area for future growth.

Niche Brand:

UBNT competes with many firms in the enterprise routing space including Cisco, NetGear, Linksys, ASUS, Belkin and Eero. UBNT has been able to differentiate itself through product performance and an active online community. On websites such as Amazon, UBNT’s products are consistently highly rated, with negative reviews appearing to be isolated incidents. The firm’s online community serves as a place for troubleshooting and collaboration. The online community contains more than 1000 individual users and over 1000 unique posts daily, with a scoring system to highlight helpful solutions. Additionally, users can post Community Stories that detail the ways they use UBNT’s products. Although
it may seem trivial, the platform is a very cost effective way of providing tech support, engaging customers, and providing ideas for further product use.
Favorable Tax Rates:

Due to UBNT’s exposure to international markets, the firm’s tax rates are exceptionally low. During
fiscal years 2013, 2014 and 2015, the company’s effective tax rates were 12%, 9% and 11%, respectively. In the most recent quarter, UBNT derived 35% of sales from North America, 9% from South America, 44% from Europe/Middle East/Africa, and 12% from the Asia Pacific region. Although sales in the US have outpaced overall growth, the company should continue to enjoy a low tax rate in the foreseeable future. Strong Financials: UBNT has seen steady revenues over the past three years, with modest growth on the top line and few Non-operating Expenses/Special Items. Although the company recorded a $39M loss as a Special Item in Q4 of 2015 (related to external email fraud), that appears to be an isolated incident and the company does not expect further losses from it. On the Balance Sheet, 76% of UBNT’s total assets or $503 million are cash, which compares very favorably to its total debt of $156 million. In the past, the company has expanded in areas that complement existing products, particularly targeting small business opportunities. The large net cash base gives the firm the ability to quickly respond to new
demands as they see fit.

Catalyst:

UBNT is making an official expansion into the Enterprise Home Wifi space with a new product: AmpliFi. AmpliFi began shipping in June 2016 and is the company’s first enterprise product geared specifically toward residential consumers. The product is an early push for next gen wifi routing technologies for the home. We believe AmpliFi is an extremely attractive product for residential applications, boasting exciting growth potential. Specifically, AmpliFi looks to solve four problems in the home wifi space:

  1.  Appearance: Many routers have the same general design (flat plastic stacked with antennas). Once active, routers are generally stored away or shuffled into a corner. AmpliFi has a unique cube shape with an LCD screen, as well as a sleek, white/chrome finish. It is designed to be part of the home environment, not just hidden from view.
  2. Setup: Although many consumer-grade routers have simple setup (plug in, enter the password and go), enterprise-grade devices can require special software downloads and initial setups on computers by professionals. Additionally, wifi range extenders often require multiple Ethernet access points to cover a larger area, meaning homes could experience wifi dead zones if Ethernet cables do not run to specific points. AmpliFi is set up as a single router with two range extenders. The router is enabled by powering up and downloading an App. Interactions with the router are done exclusively via the App. The two range extenders plug only into power outlets, eliminating the need for multiple Ethernet access points. /
  3. Reliability: Once initialized, consumer-grade routers often have to be reset due to storms, power surges, and other events. Additionally, changes to IP addresses by internet providers can disrupt routers and wifi access. AmpliFi should address these
    issues with smart monitoring (automatic resets if issues arise and recognition of changing IP address). Furthermore, users can interact with connections via a downloadable App, allowing resets and other actions to occur from a mobile device.
  4. Security: Most home users are blind to which devices are connected to a router. For urban environments (condo’s and apartment complexes), this can lead to security risks if connections are compromised from neighboring units. AmpliFi’s mobile App allows users to view connected devices in real time. Additionally, users can also set up guest access via the App for any
    visitors. According to Connected Intelligence, in the US, it is estimated that there are currently 7.8 connected devices per household Household wifi devices have grown tremendously over the past decade from laptops and mobile, to smart TV’s and watches. Today, other household products such as refrigerators and advanced security systems (doorway cameras, entry point tracking) are beginning to rely on wireless connections. If the number of connected devices per home continues to increase, advanced wifi routers and related devices could become a more critical part of households.

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About Value Expectations 16 Articles

ValueExpectations.com, by the founders of The Applied Finance Group is an investment blog that provides institutional quality equity research using AFG’s proprietary Economic Margin framework.

About Value Expectations 16 Articles

ValueExpectations.com, by the founders of The Applied Finance Group is an investment blog that provides institutional quality equity research using AFG’s proprietary Economic Margin framework.