Morgan Stanley Cuts Ubiquiti To Sell, Believes Valuation Hasn't Caught Up With Opportunities

• Ubiquiti Networks Inc UBNT shares have been volatile in 2015, and are up 7 percent year-to-date.
• Morgan Stanley’s James E Faucette downgraded the rating on the company to Underweight, while maintaining the price target at $24.
• Although the company’s operating model remains impressive, investments in new unrelated areas may lower ROI in the near future, Faucette mentioned.

Ubiquiti Networks has a unique business model that targets traditionally underserved markets with affordable quality products like wireless broadband and enterprise class WiFi. The company’s core markets are, however, experiencing a slowdown in growth and compression in operating margins, analyst James E Faucette said.

Currency and economic headwinds have led to a contraction in the growth of the company’s core services provider business from 58 percent in FY14 to merely 7 percent in FY15.

A slowdown in growth in the core markets has resulted in Ubiquiti Networks making increased investments in several new and unrelated areas, Faucette stated, while adding, that this incremental investment may lower ROI projects.

Ubiquiti Networks’ investments in unrelated and multiple areas has resulted in a 190 bps decline in the company’s operating margins in FY15. Faucette expects the company’s operating margins to contract by another 260bps in FY16 to 30.4 percent.

“UBNT's valuation has been resilient despite slowing growth in core markets, delayed refresh cycles & increased spending in ancillary areas w/o a firm timeline to monetization. Operating model remains impressive, but valuation has detached from likely opportunities,” the Morgan Stanley report mentioned.