Ubiquiti is one of the most interesting companies I track that very few people have heard of. Our firm has been a shareholder of the company since early 2017. This blog post is the first of a series that I plan to write discussing the company and its media-shy founder in detail.
Ubiquiti was started in 2005 by Robert Pera, a former Apple engineer, in his studio apartment. The company has been profitable every year since its inception (all except FY10 when they were facing copycat products). As a result, it never needed to raise venture funding which is partly why Pera still maintains a high ownership stake. Ubiquiti currently has a market capitalization of roughly US$12 billion. Pera owns 88% of the company which means his stake in the company is worth over $10 billion. He takes no salary (never took a salary and never gave himself stock compensation) and continues to be the driving force behind the company. It is worth noting that he is only 42 years old.
Tracking the company is not easy anymore as they have stopped doing investor calls or providing forward financial guidance since 2018. As the free float of the company has gotten smaller and smaller, Pera probably just felt that it wasn’t worth his time. It’s even possible that, at some point, he buys out the remaining shareholders and takes the company private. We can still get bits of insight from their quarterly financial releases but we have to rely on historical presentations to understand the company strategy. I hope this writeup provides some context on why we think it’s such an interesting company.
The origin story
As told by Pera himself on his blog:
“Ubiquiti Networks was bootstrapped with no operational funding from inception up to the IPO. For a software company, this path is challenging enough. But, Ubiquiti makes hardware. And with making hardware comes the additional financial burden of funding larger and larger manufacturing expenses as the business grows.
When I left my job at Apple in 2005 to dedicate myself to Ubiquiti, my only thought was “if this doesn’t work out, I am screwed.” It was March of 2005 and my $600/month studio apartment lease down the street from Apple HQ was coming up for renewal. Instead of committing to another year, I moved my futon and my HW lab into an economical $650/month office surrounded by bail bonds shops across the street from the San Jose Courthouse where I would make my home for the next several months. Although there was sufficient capital from upfront customer down payments to fund the first manufacturing builds, I was locked in survival mode and entirely focused on how I was going to setup manufacturing, make the shipment lead-times, support initial customers, come up with new product designs, and build the Ubiquiti brand.
In 2005, Ubiquiti would launch its first product called “SuperRange” – essentially a super-charged Wi-Fi module for long-distance outdoor wireless applications.
Because the product had incredible demand from a niche market of independent operators and distributors that served them, we were able to secure customer payment upfront to fund manufacturing and instantly became a profitable business with cash flow.“
What does the company do?
Ubiquiti makes products and solutions in two main categories: high performance networking technology for 1) service providers and, 2) enterprises. They also have a small consumer business. They manufacture their products through OEMs (Original Equipment Manufacturers) in China, Taiwan and Vietnam.
Service Provider segment (roughly 1/3rd of overall revenues) is mainly network infrastructure for fixed wireless broadband, wireless backhaul systems and routing, and the related software for WISPs (Wireless ISPs) to easily control, track and bill their customers. Wireless broadband uses microwave transmission to connect remote areas to the internet where laying fiber would not be economical due to low user density. The customers are mainly WISPs who tend to be small entrepreneurs looking to deploy internet in their locality. This is now a mature and stable segment growing in mid-single digits.
Enterprise WiFi segment (roughly 2/3rds of overall revenues) is mainly equipment used to deploy a wireless LAN (“WLAN”) infrastructure over a large area, such as a hotel, university campus, or large office complex. This segment also includes video surveillance products, switching and routing solutions, security gateways, and other complimentary WLAN products along with Ubiquiti’s Unifi software platform, which enables users to control and monitor their network from one simple, easy to use software interface. The Enterprise segment has been driving the overall growth in the last few years though it slowed down in the recent quarter due to the impact from the ongoing Covid-19 crisis.
In addition, Ubiquiti has started a line of consumer-oriented WiFi mesh equipment for the home but this remains small – mainly since the company doesn’t do a good job of selling to retail consumers. But this segment doesn’t move the needle. The company now combines the revenues it gets from this segment into the Enterprise segment.
Their sales is well-diversified globally (see table below) though still primarily in developed markets:
Following the cash: share repurchase history and dividends
Ubiquiti went public in Oct 2011 raising US$106 million (7.04 million shares at their IPO price of $15). Even in the IPO, almost 2/3rds of the money was secondary placement, which was mainly their private equity investors cashing out, so the company essentially raised ~$37 million in primary issuance which was used to pay off a convertible-debt tranche. Meanwhile, since the IPO, the company has returned $2 billion in stock buybacks and $180 million in cash dividends to investors.
If Ubiquiti is a fraud (as some short-sellers alleged), where did this $2.2 billion come from?
And management could easily pay themselves a hefty salary or pay out a high dividend (which would largely go to Pera as he owns most of the shares)? Instead, they mainly bought back shares with the free cash flow!
Ubiquiti the Cannibal
Charlie Munger, vice-chairman of Berkshire Hathaway, says “pay attention to the cannibals”. He means we should closely look at cash-rich undervalued businesses that are buying back huge amounts of their stock as these businesses can generate a lot of value for their shareholders.
Well, Ubiquiti generates a ton of free cash and management has an excellent track record of aggressively buying back shares when they are priced cheap (as can be seen in the table below):
Since their IPO, Ubiquiti’s free float has gone down from 36.2mn shares to 7.5mn shares currently – a reduction of almost 80%!
Pera has mentioned being a fan of Henry Singleton of Teledyne who bought back 90% of the outstanding stock of Teledyne when it was trading cheap. He is clearly following in Singleton’s footsteps.
Currently, Ubiquiti has an outstanding share repurchase program worth ~$538 million. Their free-float is just ~7.5 mn shares. At the recent share price (~ $183.5), the free-float is worth $1.2 bn so the buyback is for almost ~40% of the outstanding free-float. The company was recently buying back shares at $138. This is an excellent asymmetric risk-reward situation.
In Part 2 (here), I discuss Ubiquiti’s business model and how they are able to maintain their high profitability.
In Part 3 (here), I put together our responses to the most common questions we get asked about our investment in Ubiquiti.
Disclaimer: Our firm owns shares of Ubiquiti. This is not a recommendation to buy, sell, or hold the stock. We may change our mind on the company at any time without informing you (or updating the blog). You shouldn’t be taking investment advice from a stranger on the internet anyway.