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Navellier’s “The Man Who Went the Last Mile” Pitch

What's the "like NVIDIA was a year ago" stock from Navellier's Ultimate Growth?

By Travis Johnson, Stock Gumshoe, April 3, 2017

Louis Navellier hasn’t popped his head up here in Gumshoedom in a while, so when a reader asked me to pour his latest slurry of tantalizing tidbits into the Thinkolator, well, I hopped right to it.

For those who don’t know him, Navellier has been around for a few decades as one of the original “quants” in newsletter world — he runs several newsletters that have large lists of stocks in their portfolios, selected by screening for his quantitative signals that indicate stocks will rise (my interpretation is that his system relies heavily on earnings growth, changes in analyst forecasts, revenue growth, and the momentum and size of those growing numbers — with a special interest in accelerating growth and “surprise” growth).

“Growth” and momentum pretty much always works as an investment strategy… until it doesn’t. “Buy what’s going up” works great… unless you happen to be the last one buying. And, of course, no one can really know in advance when the end of an upward move comes, which is why most investors who use quantitative systems like this are sure to diversify and just follow the system… the more you think about it and analyze the results, the more you mess up the chances for the system to work by layering your personal psychological biases on top of it.

(Quantitative analysis and the search for the “signal” that a stock will rise is also a far more crowded business than it was 20 or 30 years ago… the consensus among hedge fund traders seems to be that quantitative strategies don’t work for long, the supercomputers and MIT grads seek out their edge every second of every day and they’re getting better and better at it — so once a few folks find an edge that “beats the market” by following a quantitative signal, you’re sure to see others also identify it quickly, so you’re lucky if that “signal” works for more than a year or so before it becomes too widely followed to be effective. But we’ll leave that bigger picture concern for another day.)

The newsletters service that Navellier is selling today is called Ultimate Growth, which will cost you $1,695 a year (FYI, don’t get too excited about the “urgent opportunity” or “3 days only!” sales you might see in these ads, they say this “normally costs $5,000”, but I don’t think I’ve ever seen them charge that much for it… most newsletters habitually charge an “on sale” price with a “limited time offer!” just because they know you need an extra impetus to pull out your credit card before your attention drifts to the next email in your inbox).

And Navellier pulls out everyone’s favorite growth stock, NVIDIA, which was the best large cap stock in the market last year with a phenomenal gain, and essentially says that he’s going to ID the next NVIDIA for you… here’s a taste of the ad:

“NVIDIA is on the verge of becoming a household name after having outperformed every other stock in the S&P 500 in 2016, stealing the spotlight at the famous Consumer Electronics Show, announcing a huge partnership with Audi for a self-driving car and more.

“But the rest of the stocks I want to tell you about are like NVIDIA was a year ago—off the radar companies with monster earnings and sales growth and huge profit potential.

“There’s just something especially exciting and rewarding about buying a little-known company that most other investors have never heard of on the ground floor and riding it all the way up, isn’t there?”

It’s true… another human weakness, many of us would subconsciously prefer to find a new and exciting unknown stock rather than make just as much (or more!) money on a stock that everyone already knows about. Sometimes being “in the know” is more fun than maximizing your gains.

So what is the first stock he pitches as this “like NVIDIA was a year ago” stock? Here’s part of the pitch:

The Man Who Went the Last Mile

“Disruptive companies—those that bring about real change—start with disruptive leaders willing to take a chance.

“… this company was founded by a young engineer who originally went to work at Apple for a visionary he looked up to.

“While there, he soaked up the Apple culture and learned to do things the Apple way.

“And then, one day while running tests to evaluate the performance of Apple’s Wi-Fi devices, he noticed something…

“He noticed that by bumping up the power of the devices, he could get much greater range without exceeding regulatory limits for electromagnetic emissions.

“And that means the Wi-Fi signal could go much, MUCH farther.

“We’re not talking just covering the dead zones in your house… we’re talking spanning over ten city blocks.

“But when he approached his bosses at Apple with the discovery, they weren’t interested in pursuing it. So, he did something Steve Jobs himself might have done… he quit and started his own company.”

That’s a good back story — it’s more fun to buy a stock when you feel like the guy in charge is a swashbuckler and a rebel who does things his own way, right? So what is it that the company actually does? Here’s a bit more, hint-wise:

“Today, his company has solved what networking professional call the ‘last mile’ problem—how to get internet to rural communities and other areas where current wired and satellite networks don’t have coverage….

“The primary internet service provider in Cyprus recently used this company’s products to create a country-wide Wi-Fi internet system that covered all five cities and the surrounding areas.

“The resulting system was so good that many residents who already had phone-based internet service switched to the new service because it was cheaper, faster AND more reliable.”

And the numbers sound pretty good — as you would expect, from a newsletter that screens for earnings and revenue growth:

“In the fourth quarter of 2016, they reported sales of $185.7 million—a 27.8% increase from the previous year. But earnings surged a stunning 1,280% to $57.7 million.

“And the growth is still coming. In the first quarter of 2017 revenues are expected to rise as much as another 25% and earnings are forecasted to grow as much as 45%.”

So what’s the stock? This is, sez the Thinkolator, Ubiquiti Networks (UBNT).

Ubiquiti was founded by an Apple alum, Robert Pera, who had developed a way to “supercharge” wifi, and he left Apple to form a company to sell this high-performance networking equipment to enterprise customers. They went public in 2011 and made a lot of money for Pera (he’s an NBA owner now, appropriately enough — owning a sports team is the clearest way to say, “I have more money than I know what to do with”), though the company’s performance has certainly had its ups and downs during the past six years or so — the most recent hiccup came in early February, when they released their Q2 earnings (December is the fiscal second quarter for them) and failed to meet their own guidance on earnings.

Missing analyst earnings estimates is bad, generally speaking — but failing to even hit the bottom end of your own forecasts is worse. The stock fell 20% or so, and has stuck around that $50 level since.

So what does the valuation look like? Well, not so bad, actually — they still grew nicely in the quarter, they just didn’t grow quite as nicely as expected. And earnings growth expectations have definitely moderated going into the future, but they are still expecting to grow earnings about 20% this year and another 10% next year (though the few analysts who have 2019 estimates up are expecting a flat year that year). That’s not eye-popping growth, but it’s not all that bad for a stock that has a pretty fair current valuation, with a trailing PE of about 17 and a forward PE of 15.

I do wonder whether the ad was put together a little while ago and just hasn’t been updated, though, because that February challenge for UBNT brought the stock down a peg in Navellier’s public grading system, from an “A” to a “B” (though it’s still a buy, his system says). The fourth quarter numbers he references are quite old, since their fourth quarter ends in June, but they are a perfect match for the hints.

So it’s an interesting company, with pretty high historic growth but no real consistency to that growth and, clearly, even the management has some difficulty predicting what any given quarter will look like. It’s really a question of whether they can keep growing — even if the growth is at only 10% a year, then paying 15 times earnings is not ridiculous… but if earnings are going to flatten out or fall, then you wouldn’t want to pay this much.

They are buying back stock, which is interesting for a smallish company (their market cap is about $3 billion), and they haven’t been terribly foolish about their buybacks like many companies are (they tend to buy back when the price is lower, which is what you want — but the general tendency for companies is to buy back shares when the stock is high), so they’ve been shrinking the share count and growing revenue and earnings. The problem, it seems is operational — they’re seeing lower margins, which is partly a result of their overseas sales (the last quarter was a great one for the dollar, which meant that sales in Euros, for example, were less profitable for US companies), and perhaps partly a result of competition or higher costs, it will be a while before we really know.

Ubiquiti’s consumer product is called Amplifi, and that’s a major area of push for them as they try to sell higher-end WiFi systems into homes and businesses (I considered buying one of them, but decided on Google’s competing WiFi Mesh system instead), but the real driver of their results is still their UniFi enterprise WiFi technology, sold to businesses, hospitals, hotels, etc., including wide-area applications, and their airFiber and airMAX longer-distance wireless network products that power things like that Cyprus wireless network.

This is not likely to be a nosebleed grower, but the valuation is pretty reasonable an they are growing, with a clear focus on expanding into new markets, so there’s certainly a chance that they could surprise and do a little bit better than expected as the next couple years go by — their goal is to hit a billion dollars in revenue in 2018, and analysts are still short of that projection (expecting about $850 million this year and $940 million in FY2018, which starts July 1), so it’s not outlandish to think they might reach that point… but, of course, we’ve already seen what happens to the stock when they come in a little bit short of their numbers, and they still have more than half of their sales outside the US so other currencies will probably continue to have an impact as they rise and fall versus the dollar.

My first impression is that the stock is getting to a pretty reasonable valuation now, but my concern is that their push more into “regular” enterprise and home applications brings with it a much more competitive marketplace where they may no longer be the much cheaper or more responsive company, like they have been in the innovative airMAX and long-distance network business where they’re undercutting much more expensive and much more regulated telecom networks. They have done well at cutting costs, but they also face large competitors now who have large marketing budgets… we’ll see how it goes, but I’d be tempted to keep an eye on this one. For what it’s worth, the disclosures on Motley Fool articles indicate that one of the Fool services, probably their growth-oriented Rule Breakers newsletter, also recommends UBNT shares. You can see Ubiquiti’s latest investor presentation here if you’d like a bit more of an overview.

And that’s all we’ve got time for today, friends — Navellier did tease a second stock in this ad, so I’ll try to get that one named for you next time.

Any interest in Ubiquiti, or in Navellier? Experiences with either? Please let us know with a comment below.

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5 years ago

I have bought his mutual fund and not done well. I am in an investment club which takes his advice way too often.

Michael Orwin
Michael Orwin
5 years ago

I suggest reading the articles and comments about UBNT on Seeking Alpha, where the business model and disruptive pricing are discussed.

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Michael Orwin
Michael Orwin
5 years ago

I forgot to say I’m long UBNT.

Grant Beaty
Grant Beaty
5 years ago

I’ve been following UBNT for years. I have a few corrections and comments:

Their market cap is $4B, not $3B. It was $5B before Feb earnings.

Growth isn’t smooth quarter over quarter because the vast majority of their revenue comes from hardware sales.

The company doesn’t provide forecasts beyond the next quarter, so I’m not sure where you’re getting the 20% this year and 10% next year figures. Even if the next two quarters produce only $0.72 EPS, they’ll still have grown 25% this year.

Their analyst forecasts are systematically wrong and should not be used to judge future growth. The analyst mean is usually 8% lower than reported earnings, and analysts have never forecast long-term growth for as long as I’ve followed UBNT. Using all past ERs as a guide, the best way to forecast earnings is to take UBNT’s high estimate and add a cent or two.

The company’s buybacks are indeed well-timed, generating 84% better returns than a naive buying strategy. Its worth noting that the company is quite possibly buying shares back today.

UBNT is not seeing historically low margins. Last quarter was a big drop, but still above the historical mean. Robert says margins will increase this quarter, while analysts seem skeptical. I personally trust the CEO and his well-timed buybacks over systematically-wrong analysts without skin in the game. The company has forecast “long term” margins in the 45-50% range.

There are significant growth drivers ahead:

They have only a tiny (2.2%) portion of the global wifi market, and are moving up into the enterprise with more expensive access points (the $350 UAP-AC-HD and $550 UAP-AC-SHD). Pera has said a $1,000 AP is coming. With higher ASPs has come higher margins. I expect this trend to continue, though it may be offset by weaker margins in other product lines (AirMax).

The massive growth of UniFi over the last year has been mostly in the US, meaning there’s a lot of potential for international growth. In the last earnings call, Pera said some of the reason for the miss was the opening of new distribution centers in Europe. There are also efforts underway to translate the UniFi software into more languages.

Recurring revenues, in the form of UniFi elite, are coming.

They’re moving into fiber optic networking with UFiber, which is in beta testing and should be announced this month.

LTU, a clean-slate approach to fixed outdoor wireless, is coming. This could be a massive improvement over the 802.11-based systems which were popularized by UBNT and dominate the market today. My guess is it will offer LTE-like performance at a much lower cost.

AirMax revenues have been flat or declining despite a rapidly growing market, because their launch of AirMax AC a few years ago was a flop. The products work well in some places, but may key features were missing or very late to arrive. They’re currently beta testing gen 2 AC products, and the testers have many positive things to say. Expect an uptick in AirMax sales over the coming quarters, especially if they can get GPS sync (one of those missing key features) working. The only way for AirMax to go from here is up.

The dollar has been strong, which historically works against UBNT.

There are some negatives as well:

AmpliFi does not appear to be selling well. This probably isn’t much of a loss, as Pera is very frugal with his R&D spending. UBNT actually has many product lines which flop, usually ones unrelated to their networking focus (VOIP, SunMax, mFi, etc.).

I suspect competition is pushing AirMax margins down.

There’s a lawsuit concerning some employees pirating software which might have some teeth to it.