The Simple Reasons I Won't Buy Ubiquiti Networks, Inc. Stock

Despite the nearly 17% run-up following fiscal 2017's fourth-quarter earnings report, Ubiquiti (NASDAQ: UBNT) stock is still down 11% this year. But higher-than-expected revenue, earnings per share, and beating analyst estimates seem to have brought many investors back into the fold.

It's easy to see why Ubiquiti has been the recipient of good tidings lately, but putting the good news aside for a moment, I still have several questions about Ubiquiti stock, some more tangible than others. But like many long-term investors, for me, uncertainty generally translates to looking elsewhere to buy a stock.

What's not to love?

The record-setting $228.6 million in revenue and $0.75 earnings per share (EPS) excluding one-time items Ubiquiti generated in its fiscal fourth quarter handily beat estimates of a mere $216 million and EPS of $0.69 a share.

Total revenue climbed 23%, while Ubiquiti's adjusted EPS rose a more modest 8.7%. Including expenses, Ubiquiti's per-share earnings were $0.74, a 7% improvement year over year. Total sales and EPS gains weren't the only good news Ubiquiti shared last quarter; its enterprise technology unit revenues rose 48% due in part to sales of switches, gateways, and access points.

Last quarter also saw the introduction of several new products, which pressured gross margins since Ubiquiti traditionally sells new solutions at a lower price point to fuel adoption, then works to become more efficient to lower overhead. And the balance sheet strengthened in the fourth quarter to $604.2 million, up from $533.9 million a year ago.

What I don't love

Ubiquiti added over $50 million to its long-term debt and nearly $4 million of short-term debt compared to last year and combined, it now carries $256.6 million on the books. Sure, that kind of debt load will add to a cash hoard, but it seems on the high side to me.

Another reason I won't buy Ubiquiti stock is that networking and hardware, whether to "connect" users or to develop next-generation consumer electronics, doesn't have the same growth potential as cloud infrastructure-as-a-service (IaaS), for example. The growth potential of networking rises if it's focused on cloud IaaS solutions, but that raises another concern.

At a $4.1 billion market capitalization, Ubiquiti faces some stiff competition from some of the networking market's biggest hitters, including Cisco (NASDAQ: CSCO). Cisco is in the midst of a shift away from "old-school" switches and routers to offering more software and cloud-based IaaS solutions. However, though Cisco's switch and router sales were down last quarter, combined, they still generated $5.33 billion in revenue -- more than Ubiquiti's market cap.

Another concern is why Ubiquiti's EPS growth was less than a third of its revenue gain on a percentage basis: Expenses are soaring. Last quarter's $31.53 million in operating expenses was a 31% increase over last year. To be fair, Ubiquiti cited a "non-recurring engineering" payment of $4 million as part of the reason for the boost in spending. But "non-recurring" doesn't mean one-time, it simply means irregularly, so given its business model, there will likely be more.

Speaking of business models, a less tangible but no less important reason I won't buy Ubiquiti stock is its approach to generating sales. Rather than employ sales folks, Ubiquiti relies on its "user community" to generate business. It's working at Ubiquiti's size and scope, but I question just how big can it get to fend off the Ciscos of the world, let alone maintain high revenue growth rates.

Following last quarter, an argument could be made for buying Ubiquiti stock, I completely understand that. However, from its odd way of conducting business to plying its trade in less-than-stellar growth markets -- and several reasons in between -- I'll avoid Ubiquiti stock.

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Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ubiquiti Networks. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.