Why Ubiquiti Got Destroyed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Ubiquiti Networks (Nasdaq: UBNT  ) got slaughtered today, falling 42% after the company blamed counterfeiters for a weak forward outlook, despite beating expectations for its latest quarterly earnings. The proliferation of fake wireless products pushed guidance for the upcoming quarter down to a $62 million-$70 million revenue range, with $0.14-$0.17 predicted in non-GAAP EPS.

So what: The counterfeit products are apparently manufactured in South America and widely distributed in China. Ubiquiti claims that a group of former distributors has essentially hacked into its sales channels and is now distributing its fake products as the real thing. Guidance now shows a steep drop from current-quarter revenue of $94.9 million and $0.30 of EPS.

Analysts had expected $98.4 million revenue and $0.29 of EPS for the upcoming quarter, so many were caught by surprise. The counterfeit warning has led to multiple downgrades today, reflecting a lack of confidence in Ubiquiti's ability to deal with this challenge over the short run.

Now what: This sad episode is just another skirmish in the losing war many American high-tech companies have fought against Chinese firms. I feel bad for Ubiquiti's executives, who must feel that the rug's been pulled out from under them, but that doesn't mean it's become a screaming buy. Guidance has cut forward EPS in half, so a 42% drop may not be the end of it. Don't expect Chinese authorities to step in; Ubiquiti's probably on its own in the Middle Kingdom.

Want more news and updates? Add Ubiquiti Networks to your Watchlist now.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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