Bonsai Partners: Ubiquiti ($UI) Investment Case
Introduction In their 1H 2024 investor letter, Bonsai Partners introduces a new investment in Ubiquiti Inc. ($UI), highlighting it as a compelling opportunity despite its unconventional nature. Bonsai Partners, known for their focus on long-term value creation, presents Ubiquiti as a prime example of their investment philosophy. The letter emphasizes the importance of identifying businesses with unique models and strong competitive advantages, even when they don’t fit traditional investment criteria. Bonsai’s decision to invest in Ubiquiti comes after extensive research into the company’s business model, financial performance, and leadership, reflecting their commitment to finding overlooked opportunities in the market.
Investment Highlight: Ubiquiti Inc. ($UI)
Business Overview
- Provider of networking technology hardware
- Founded and led by Robert Pera, who owns ~93% of outstanding shares
- Operates with a lean structure and minimal investor relations activities
Market Position
- Offers products with ~70% functionality of enterprise-grade equipment at roughly one-third the price
- More profitable than competitors despite lower prices
- Targets prosumer market, small and mid-sized organizations, and international markets
Performance Analysis
- Unique Business Model:
- Leverages “operational float” where customers and partners cover many operating expenses
- Extremely low operating expenses (10% of revenue vs. 30-60% for competitors)
- High profitability despite lower prices (median 32% operating margin, 60% ROIC)
- Product Focus:
- Emphasis on better-designed, lower-priced versions of industry-standard products
- Over 1,000 of ~1,500 employees in R&D
Growth Runway
- Long-term revenue CAGR of 34% (2008-2023)
- Continued focus on product development and market expansion
- Potential for further market share gains in target segments
Market Dynamics and Opportunities
- Disruptive pricing model difficult for competitors to match
- Strong customer loyalty due to price-to-quality ratio
- Opportunity in markets seeking high-quality products on limited budgets
Valuation and Capital Allocation
- Acquired at historically low valuation multiple
- Strong free cash flow conversion
- Aggressive share repurchases ($2.8 billion from 2016-2023)
- Potential for continued buybacks once debt reduction is complete
Risks
- Operational footprint and governance concerns
- Lean executive team and board structure
- History of operational missteps, though improvements have been made
- Dependence on founder’s vision and leadership
Other Key Points
- Unconventional leadership style of Robert Pera
- Asset-light approach with outsourced production
- No history of acquisitions
- Discontinued earnings calls and investor relations activities since 2018
Bonsai Partners views Ubiquiti as an unconventional but potentially rewarding investment, citing its disruptive pricing model, strong profitability, and aligned ownership as key factors. They believe Ubiquiti has the potential for attractive long-term compounded growth despite the associated risks.
Click here for the full Pro Investor Letter.
Disclaimer: The information provided in this blog post is for informational and educational purposes only and does not constitute financial, investment, or other professional advice. The content is based on a third-party investor letter and does not represent an endorsement, recommendation, or solicitation to buy or sell any particular security or investment product mentioned.
Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. Investors should carefully consider their investment objectives, risk tolerance, and financial situation before making any investment decisions. It is strongly recommended to conduct thorough research and due diligence, and to consult with a qualified financial advisor or professional before making any investment decisions based on the information provided in this blog post or the referenced investor letter. The author of this blog post and the owners of this website are not responsible for any investment decisions made by readers and disclaim any liability for any actions taken based on the content presented herein.
