Ubiquiti's Growth, Tariffs, and Valuation Evaluation After Exceptional Q4 Results (Rating Enhancement)
Ubiquiti Inc., a leading provider of network technology solutions, has reported impressive growth in its Q4 results. The company saw expansion across most markets, with a significant increase in revenue in North America (50.0%), EMEA (56.5%), and the Asia Pacific region (47.5%).
The Q4 revenues reached an impressive $759.2 million, a 49.6% year-on-year increase, and surpassed Wall Street's estimate by a massive $124.0 million margin. This strong performance also translated into a Q4 adjusted EPS of $3.54, beating the expectation by $1.31.
However, the company faces a potential challenge due to tariffs on its cost of goods. Assuming a 45% gross margin and an incremental 25% tariff rate, Ubiquiti is estimated to face a total of $164.1 million in tariff pressure. The company primarily sources its products from Vietnamese and Chinese contract manufacturers, now facing significant tariffs of 20% and 30%, respectively.
Ubiquiti's Q4 operating income surged by 88.9% year-on-year to $261.4 million. The company also announced a rise in the regular quarterly dividend to $0.80 from $0.60 and authorized $500 million in share buybacks.
The fair value estimate for Ubiquiti has been revised upwards from $278.7 to $427.8. However, this estimate represents nearly a fifth of the fiscal year's total operating income, indicating a potential growth trajectory.
The DCF model for Ubiquiti has been updated, with a rapid FY2025-FY2035 CAGR of 13.4% assumed. The cost of capital [WACC] for the company, derived from a capital asset pricing model, stands at 9.78%.
It's important to note that Ubiquiti's latest 10-K notes that tariffs will significantly increase Ubiquiti's product costs and continue to affect operating results as long as such tariffs are in effect.
Professor Aswath Damodaran, who provided the unlevered beta value for the electrical equipment industry in July at New York University (NYU), was instrumental in the cost of capital calculation. The 10-year bond yield of 4.26% and the US equity risk premium of 4.62%, as per Damodaran's most recent July estimate, were also used in the cost of capital calculation.
In conclusion, Ubiquiti Inc.'s Q4 results exceeded all expectations, but the company faces potential challenges due to tariffs. Despite this, the company's strong performance and positive outlook suggest a promising future.
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