August 10, 2012
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.
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