Ubiquiti Networks (NASDAQ:UBNT) -- which bounced between the mid-$40s and low $70s over the past 12 months -- has been a tough stock to hold. Shares plunged in February after a bottom-line miss, soared in August after a big earnings beat, then dipped again in November after the company posted solid first-quarter earnings with soft second-quarter guidance.

But after all that drama, Ubiquiti remains up nearly 20% for the year. Therefore, I believe investors who can stomach the volatility should still buy this stock on the dips as a long-term investment.

An illustration of wireless connections across a city.

Image source: Getty Images.

What does Ubiquiti Networks do?

With a primary focus on underserved and emerging markets, Ubiquiti is a networking equipment company that develops wireless data communication products for service providers and enterprise customers.

Having carved out a disruptive niche in long-distance Wi-Fi products, it has sold over 70 million devices worldwide via a network of over 100 distributors and retailers since its founding in 2005.

Ubiquiti uses a low-overhead model to produce high-performance products, giving it gross and operating margins of 45.4% and 35.4%, respectively, last quarter. Its global share of the wireless local area network (WLAN) market rose from 4.3% to 5.3% between the third quarters of 2016 and 2017, according to IDC.

The company is also expanding into the consumer market with its AmpliFi wireless system, which brings enterprise-class WiFi performance to homes. That platform includes a sleek box and auto-configured mesh point antennas, which are plugged into wall sockets around the home.

How fast is Ubiquiti Networks growing?

Last year, Ubiquiti's revenue rose 30% to $865.3 million, its net income improved 21%, and its diluted earnings per share grew 24%.

That growth was fueled by robust demand for its UniFi family of access points, switches, gateways, and IP cameras among enterprise customers, and strong sales of its airMAX and EdgeMAX products among service providers.

Ubiquiti's AmpliFi wireless system.

Image source: Ubiquiti Networks.

Ubiquiti's aforementioned stumble during the second quarter this year was caused by the messy launch of the AmpliFi wireless system. A rushed a "last-minute" redesign prior to its launch, and then overspending on shipping -- resulted in an earnings miss.

But looking ahead, Wall Street expects Ubiquiti's revenue and earnings to rise 18% and 25%, respectively, this year. For fiscal 2019, they expect its revenue to rise another 11% and for its earnings to grow 16%.

Recognizing the tailwinds

Ubiquiti Networks' focus on bundles of low-cost, high-powered wireless solutions makes it a more streamlined investment than more diversified networking equipment vendors like Cisco (NASDAQ:CSCO). Its growth also looks more impressive than the 1% sales growth and 3% earnings growth analysts expect Cisco to squeeze out this year.

Ubiquiti is well insulated from the commoditization of traditional routers and switches, a market where Cisco faces tough rivals like Huawei. It's also a great long-term play on the Internet of Things (IoT) market, which includes devices like cameras, industrial machines, wearables, smart home appliances, and connected cars.

Cisco expects the number of connected devices worldwide to double from 25 billion in 2015 to 50 billion in 2020. Research firm IDC expects worldwide spending on IoT products to rise from $674 billion this year to $1.1 trillion in 2021.

Ubiquiti is well poised to profit from the growth of those markets, as enterprise customers upgrade their wireless capabilities and mainstream consumers buy more smart home products, which will boost demand for high-power WiFi solutions like AmpliFi. Founder and CEO Robert Pera certainly believes in that long-term future, since he still holds over 70% of Ubiquiti's shares.

The valuations and verdict

Ubiquiti currently trades at 22 times earnings, well below the industry average of 37 for communication equipment providers. It trades at 20 times forward earnings.

Those multiples are only slightly higher than Cisco's trailing P/E of 20 and forward P/E of 16, even though Ubiquiti is growing at a much faster pace. 

Ubiquiti Networks certainly isn't a stock for everyone, since its wild swings, competition from larger networking companies, and occasional execution hiccups (like the AmpliFi launch) can rattle investors. However, investors looking for a growth story in the slow-growth networking sector should get greedy with Ubiquiti whenever the stock drops.

 

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ubiquiti Networks. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.