- By GF Value
The stock of Ubiquiti (NYSE:UI, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $307.01 per share and the market cap of $19.3 billion, Ubiquiti stock gives every indication of being significantly overvalued. GF Value for Ubiquiti is shown in the chart below.
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UI 15-Year Financial Data
The intrinsic value of UI
Peter Lynch Chart of UI
Because Ubiquiti is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 23.6% over the past three years and is estimated to grow 12.45% annually over the next three to five years.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Ubiquiti has a cash-to-debt ratio of 0.29, which ranks worse than 85% of the companies in Hardware industry. Based on this, GuruFocus ranks Ubiquiti's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Ubiquiti over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Ubiquiti has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $1.6 billion and earnings of $8.05 a share. Its operating margin of 39.00% better than 99% of the companies in Hardware industry. Overall, GuruFocus ranks Ubiquiti's profitability as strong. This is the revenue and net income of Ubiquiti over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Ubiquiti is 23.6%, which ranks better than 91% of the companies in Hardware industry. The 3-year average EBITDA growth rate is 27.6%, which ranks better than 81% of the companies in Hardware industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Ubiquiti's ROIC is 130.24 while its WACC came in at 10.26. The historical ROIC vs WACC comparison of Ubiquiti is shown below:
In conclusion, Ubiquiti (NYSE:UI, 30-year Financials) stock shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 81% of the companies in Hardware industry. To learn more about Ubiquiti stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.