Shares of Ubiquiti (UI 6.12%) rallied 7% on Monday as of 12:19 p.m. ET, despite the technology sector largely being deeply in the red today.
Ubiquiti doesn’t really move with the indexes, though, as it’s not part of most indexes due to its extremely high insider ownership and minimal disclosures. Still, that doesn’t mean you should ignore this interesting company, as evidenced by today’s move and the stock’s long-term performance.
Additionally, the stock got a lift today thanks to a big price target increase from a sell-side analyst.
BWS raises its price target by 50%
Today, BWS Financial, a boutique sell-side analyst firm that focuses on companies “off the beaten path,” raised its price target on Ubiquiti by a whopping $80, from $160 to $240.Of note, the analyst already had a buy rating on the stock, which Ubiquiti had exceeded last week. So, the analyst may be adjusting his target after Ubiquiti posted earnings last week and Federal Reserve Chair Jay Powell gave a dovish speech at Jackson Hole on Friday.
Interest rates are important to Ubiquiti in a few ways. One, as a technology hardware provider selling relatively expensive capital equipment to wireless service providers and small and medium businesses, higher interest rates tend to depress demand for Ubiquiti’s customers, all while raising the cost of financing and holding inventory. So lower interest rates would tend to reverse those negative trends and improve demand.
Second, Ubiquiti suffered shortages during the pandemic, then loaded up on variable-rate debt after the supply constraints of 2021 and 2022 in order to buy up more inventory. As interest rates rose since 2022, Ubiquiti’s interest expenses increased in a big way. Yet the move may have been misguided, as revenue then slowed and Ubiquiti has taken some inventory write-offs in recent quarters.
The good news is that even though Ubiquiti’s revenue missed analyst expectations and earnings per share were only in line in the June-ended quarter, Ubiquiti is still generating a high amount of free cash flow, even in the depressed environment.
Over the past 12 months, the company produced about $530 million in free cash flow and paid down $372.5 million in debt, lowering the company’s long-term borrowings from $1.04 billion to $670 million.
That has de-risked Ubiquiti’s stock a fair amount, which was still over 50% below its all-time highs to start the day today. While last quarter’s results were lukewarm, lower rates have the potential to get earnings moving higher again.
Ubiquiti is a unique stock
Although earnings over the past 12 months are just $5.79 per share, Ubiquiti did make $9.78 at the top of the pandemic boom in fiscal 2021. It looks like BWS thinks earnings will likely be headed back in that direction, as Ubiquiti’s debt pay-down lowers interest expenses and demand reignites.
While not a cheap stock, Ubiquiti has shown itself to be highly profitable even in a depressed environment, and founder and CEO Robert Pera owns a whopping 93% of the company. While disclosures are fairly minimal these days, that’s a pretty big incentive for management to get the stock working again.
