What happened

After soaring 70% through the first four months of 2019, shares of Ubiquiti Networks (NYSE:UI) declined 29.4% in May, according to data from S&P Global Market Intelligence, after the networking hardware specialist delivered mixed fiscal third-quarter results relative to Wall Street's expectations.

Ubiquiti stock fell nearly 11% on May 10 alone -- the first trading day after its report was released -- after the company confirmed its fiscal third-quarter 2019 revenue climbed 13.8% year over year, to $284.9 million, translating to a nearly 30% increase in adjusted net income to $88.9 million, or $1.26 per share. By comparison, most analysts were modeling slightly higher revenue of $286 million, but with significantly lower earnings of $1.10 per share.

Ubiquiti Networks router sitting next to a pile of four books on a contemporary white bookshelf.


So what

Driving Ubiquiti's growth was a combination of its burgeoning enterprise technology segment (including its UniFi, mFi, AmpliFi, and FrontRow product lines), where sales climbed 17.4% to $175.5 million, and its service provider technology segment (including airMAX, EdgeMAX, airFiber, and uFiber products), where revenue rose 8.4% to $109.4 million. 

What's more, Ubiquiti told investors it now expects full-year revenue and earnings to be near the high ends of its previously reaffirmed outlook, which called for revenue of $1.1 billion to $1.2 billion and earnings per share of $4 to $4.80.

Given its relative outperformance in the first two quarters of its fiscal year, it seems most investors were already accounting for this optimistic forward view. And the market frowned upon Ubiquiti's update given the combination of its year-to-date rise and a tariff hike (from 10% to 25%) on goods imported from China that incidentally took effect the same day as its earnings release.

Now what

To be fair, Ubiquiti management told investors earlier this year they should be able to largely mitigate the impact of tariffs on gross margin over the long term -- though its slight revenue shortfall relative to expectations is likely to be more of a concern for our growth-hungry market in the near term.

In the end, bullish investors can take solace knowing Ubiquiti Networks' momentum and long-term growth story remain firmly intact. And I suspect this pullback will prove little more than a blip in the radar for patient shareholders years from now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.