Why Ubiquiti rallied today on a bad day for tech

Actions of Ubiquitous (Ugh 6.90%) rose 7% on Monday as of 12:19 a.m. ET, despite the tech sector being largely deep in the red today.

However, Ubiquiti doesn’t really move with indexes because it is not part of most indexes due to its extremely high ownership and minimal disclosures. However, that doesn’t mean you should ignore this interesting company, as evidenced by today’s movement and the stock’s long-term performance.

Additionally, shares rose today thanks to a big increase in price target from a sell-side analyst.

BWS raises its price target by 50%

Today, BWS Financial, a boutique analyst firm that focuses on “off the beaten path” companies, raised its price target on Ubiquiti by $80, from $160 to $240. Of note, the analyst already had a buy rating on the stock, which Ubiquiti had surpassed last week. So the analyst may adjust his target after Ubiquiti posted earnings last week and Federal Reserve Chairman Jay Powell gave a dovish speech in Jackson Hole on Friday.

Interest rates are important to Ubiquiti in a few ways. First, as a technology hardware supplier that sells relatively expensive capital equipment to wireless service providers and small and medium-sized businesses, higher interest rates tend to weaken demand for Ubiquiti’s customers, all while increasing the cost of financing and holding stocks. Therefore, lower interest rates would tend to reverse these negative trends and improve demand.

Second, Ubiquiti suffered shortages during the pandemic, then loaded up on floating-rate debt after supply constraints in 2021 and 2022 to buy more inventory. As interest rates have risen since 2022, Ubiquiti’s interest expense has risen sharply. However, the move may have been misguided, as revenue then slowed and Ubiquiti took some inventory write-offs in recent quarters.

The good news is that while Ubiquiti’s revenue missed analysts’ expectations and earnings per share were only in line in the quarter ended in June, Ubiquiti is still generating a large amount of free cash flow, even in the depressed environment.

In the last 12 months, the company produced free cash flow of about $530 million and paid down debt by $372.5 million, reducing the company’s long-term debt from $1.04 billion to $670 millions of dollars.

That sent Ubiquiti shares down a fair amount, which was still more than 50% below its all-time highs to start the day today. While last quarter’s results were tepid, lower rates have the potential to move earnings higher again.

Ubiquiti is a unique stock

Although trailing 12-month earnings are just $5.79 per share, Ubiquiti earned $9.78 at the peak of the pandemic boom in fiscal 2021. BWS apparently thinks earnings are likely to head back in that direction, as Ubiquiti’s debt payment falls. interest spending and demand reignite.

While not a cheap stock, Ubiquiti has proven to be very profitable even in a depressed environment, and founder and CEO Robert Pera owns 93% of the company. While disclosures are pretty minimal these days, that’s a pretty big incentive for management to get the stock back up and running.