Is Ubiquiti Networks the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Ubiquiti Networks (Nasdaq: UBNT  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Ubiquiti Networks.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

99.3%*

Pass

 

1-Year Revenue Growth > 12%

78.7%

Pass

Margins

Gross Margin > 35%

42.7%

Pass

 

Net Margin > 15%

29.0%

Pass

Balance Sheet

Debt to Equity < 50%

22.6%

Pass

 

Current Ratio > 1.3

3.96

Pass

Opportunities

Return on Equity > 15%

92.0%

Pass

Valuation

Normalized P/E < 20

13.56

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

        
 

Total Score

 

8 out of 10

Source: S&P Capital IQ. Total score = number of passes. *4-year growth rate.

Ubiquiti Networks weighs in with a strong score of eight points. But after a big run-up following its IPO about a year ago, the stock has plunged to nearly 20% below its offering price of $15.

Specializing in communications technology, Ubiquiti has high hopes of riding the wave of wireless networking to big profits. Despite Cisco Systems (Nasdaq: CSCO  ) playing its usual role as the giant in the industry, smaller players Aruba Networks (Nasdaq: ARUN  ) , Ceragon Networks (Nasdaq: CRNT  ) , and Ubiquiti have found ways to compete successfully by targeting certain niches in the space. While Aruba has had success going after university clients and Ceragon focuses on backhaul services that transport traffic between sites, Ubiquiti targets underserved areas like emerging markets and rural areas. As its financials show, Ubiquiti has grown quickly and came public at arguably a perfect time to capitalize on interest in the area.

Since then, Ubiquiti has gone on a roller-coaster ride. The stock started falling in May, when the company announced that it expected sequential revenue growth to slow dramatically in the company's fiscal fourth quarter ending in June. Concerns about CEO Robert Pera also weighed on investors' mind-set.

But the real problem hit Ubiquiti in August, when the company gave a far weaker outlook due to extensive counterfeiting of its products in China. As Fool contributor Rich Duprey noted, retailer Coach (NYSE: COH  ) has had some success by suing retailers selling counterfeit goods, but it's a lot harder for customers to tell whether they're buying a real version of Ubiquiti's popular AirMax product. Analyst downgrades followed, and although the company is optimistic that it can rein in the counterfeiting within the next couple of quarters, it will nevertheless put a big dent in Ubiquiti's growth story.

For Ubiquiti to stay close to perfection, it clearly needs to solve its sales problem and get back to a growth trajectory. Otherwise, the stock stands to fall further from perfection in the months to come.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Ubiquiti has a lot of promise, but only if it can get past Cisco. Get the low down on the routing juggernaut in our premium report, which can help you figure out whether Cisco is a buy right now. Our report also has you covered with a full year of free analyst updates to keep you informed as the story changes, so click here now to read more.

Click here to add Ubiquiti Networks to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach. Motley Fool newsletter services recommend Ceragon Networks and Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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