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Simon’s August Outlook: Why Long-Term Leadership Matters

August 17, 2020

Ubiquiti Networks (NYSE: UI) might not be a familiar name to most investors. The company creates the routers, switches, and radios that help devices connect to high-speed internet networks. You probably connect through them when you use the WiFi of a university or at a sporting event. They have a sleek design and incredible technical performance.

Those sleek designs and excellent performance trace their roots back to Ubiquiti’s visionary founder, Robert Pera. Pera developed a plan to escape the low-margin and notoriously-competitive internet hardware industry and created a business with market-leading profitability. Ubiquiti went public in October 2011 and its stock has become a 10-bagger since then.

Previously an engineer at Apple, Pera wanted Ubiquiti to be a leader in the Internet of Things. He envisioned a world where devices of all types could connect wirelessly to the internet and from any location. His vision has come to light in recent years with the arrival of the Internet of Things.

Ubiquiti’s competition was focused on getting the largest and most promising enterprises internet-connected, meaning that smaller and international customers were often underserved. But Pera paid a lot of attention to these smaller customers, and even created a community where his engineers could interact directly with them to better understand their needs.

Cutting out the sales middleman helped Ubiquiti save on costs. Now it could direct those funds to research & development instead. Soon, the company’s products were technically superior to those of its larger competitors. Word-of-mouth about their products spread quickly, so they didn’t need to spend as much on advertising. Operating margins shot up to 35%, and they expanded even further as Ubiquiti began winning lucrative deals from larger enterprises.

In addition to his vision and execution, Pera also held on to the ownership and control of his company. Even today, he owns nearly 90% of Ubiquiti’s stock. Only a small fraction of the outstanding shares are publicly-available, and Ubiquiti’s Board of Directors has authorized aggressive share repurchase plans. When the stock price falls, they buy back shares.

I think of Ubiquiti as a classic marriage of vision and execution. The growing demand for wireless connectivity, the expanding margins from larger customers, and the forward-thinking leader who owns a majority stake suggest that Ubiquiti could still be connecting investors with plenty more future gains to come.

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