Thursday is turning out to be a pretty bad day for investors in Ubiquiti Networks (NASDAQ: UBNT). Early this morning, one of the hottest stock shops on Wall Street pulled its outperform rating on the wireless communications hardware manufacturer, downgraded Ubiquiti to market perform -- and cut its price target all the way from $49 to $30.

The stock's already down 5% in response to this downgrade. And now the question is: How worried should you be?

The news
Bright and early Thursday morning, ace stockpicker Bernstein announced its downgrade of Ubiquiti Networks. Formerly optimistic about the stock, on the theory that the specialist in fixed wireless access and Wi-Fi would diversify into areas such as Ethernet switching, IP routing, and VoIP, Bernstein's new note indicates the analyst is now less sanguine about these prospects.

According to Bernstein, Ubiquiti has had trouble gaining "traction" in new markets. The analyst further frets over Ubiquiti's continued failure to put a permanent new chief financial officer in place since CFO Craig Foster resigned in April, and complains that the company's $46.7 million loss to an accounting fraud at its Hong Kong subsidiary last summer further dampens its enthusiasm for the stock.

Put it all together, and while Bernstein doesn't necessarily think you should sell the stock, it's not recommending you buy Ubiquiti, either. And apparently, that's a poor enough view to send investors heading for the exits today.

Let's go to the tape
Should you worry? Initial indications suggest yes. Motley Fool CAPS data show Bernstein to be one of the best analysts on Wall Street that we track. Literally. Ranked in the top 2% of investors we track, Bernstein carries our coveted "Wall Street Best" badge, awarded to only a handful of the very best professional analysts we've come across over the 10 years we've been gathering this data.

Historically, 55% of the times Bernstein has recommended buying or selling a stock, that recommendation has gone on to beat the market -- sometimes by staggering margins, with an average "win rate" of nearly 19 percentage points per pick over the S&P 500's performance. Among Bernstein's winners in Ubiquiti's home communications equipment sector, we find:



Bernstein Said:

CAPS Says:

Bernstein's Picks Beating (Lagging) S&P By:

Juniper Networks (NYSE:JNPR)



16 points




18 points




116 points

I'll risk stating the obvious here: This is a pretty good record -- and that could be bad news for Ubiquiti shareholders.

Valuing Ubiquiti
That said, even though Bernstein is downgrading Ubiquiti today, it's worth reiterating: They're not saying you need to sell the stock. Here's why not:

Priced at just 16.4 times earnings, and still expected to grow earnings at about 15% annually over the next five years (according to data from S&P Capital IQ), Ubiquiti is not an outrageously priced stock.

Free cash flow at the company is a little light: $124 million in cash profits from the past 12 months lag reported net income by about 15%. But once you back out the company's net cash, the enterprise value-to-free-cash-flow ratio takes you right back to the P/E we started with: an EV/FCF ratio of 16.4 on Ubiquiti.

A better way to make money
Worst case, what all of this means is pretty much what Bernstein told us at the outset: Ubiquiti shares are no great bargain if all it's able to achieve is what it's been achieving already -- steady performance in its core markets, and little progress in diversifying beyond them. Simply put, 15% growth isn't going to be fast enough to send this 16-P/E-ed stock on a tear.

So what's a better way to make money in the Communications Equipment sector? Call me a crazy optimist, but I think you might actually do better sticking with one of Bernstein's proven winners: Juniper Networks.

Currently "unprofitable," as GAAP accounts for such things, Juniper Networks actually boasts some pretty strong free cash flow -- more than $850 million for the past 12 months, according to Capital IQ. Against a market cap of less than $10 billion, that works out to an EV/FCF ratio of just 11.6. That's pretty cheap for a stock expected to grow earnings at 12% annually over the next five years.

Or consider another Ubiquiti competitor, not currently on Bernstein's buy list: Cisco Systems (NASDAQ:CSCO). With $11.6 billion in trailing free cash flow (20% better than reported income), Cisco shares sell for an enterprise value less than 8 times free cash flow. That's pretty cheap for a 9%-plus grower shelling out 3.3% in annual dividends. It's certainly cheaper than Ubiquiti.

Long story short: Just because Ubiquiti is failing to disrupt the markets of its competitors, doesn't mean you can't make money off of this sector. Recognizing Ubiquiti's failings just might help you to recognize the potential to profit from the companies it's failing to disrupt: Juniper Networks and Cisco Systems.