Driveby Short Seller: Citron Research’s Ubiquiti Networks Report


On Monday, small cap Ubiquiti Networks (NASDAQ: UBNT) fell 7.89%after notorious short seller Andrew Left/Citron Research issued a report calling the stock a fraud, but shares were regainingsome of what was lost in early Tuesdaytrading. Ubiquiti Networkseliminates barriers to connectivity for under-networked enterprises, communities and consumers with its leading-edge platforms that connect hundreds of millions of people throughout the world. With over 60 million devices sold worldwide, through a network of over 100 distributors, to customers in more than 180 countries and territories,the Companyhas maintained an industry-leading financial profile by leveraging a unique business model to develop products that combine innovative technology with disruptive price-to-performance characteristics.Growth is supported by the Ubiquiti Community, a global grass-roots community of 4 million entrepreneurial operators and systems integrators who engage in tho usands of forums.


Ubiquiti Networkshad also been in our SmallCap Network Elite Opportunity (SCN EO) portfolio as a M2M growth play with plenty of cash and very little debt with a November 2014 SCN EO newsletternoting:

“The Company is deeply embedded in our ongoing growth theme of M2M (machine to machine), otherwise known as the Internet of Things or IoT. Meaning, they connect “things” and if you’ve been a Member of SCN EO for any length of time, then you know it’s a growth theme we’re extremely excited about over the next ten years. As a matter of fact, whether UBNT becomes a large cap someday or not, we strongly believe it’s an excellent takeout target for a much bigger player like CSCO, IBM or GE who continue to acquire companies like this in the M2M space.”


And:

“From a fundamental perspective, UBNT is extremely attractive. A strong balance sheet coupled with an extremely reasonable forward P/E of just over 11 and a very attractive PEG of .67 makes for what we believe to be an excellent long-term investment in a Company with a mere market cap of $2.5B.”

“What’s equally as attractive is insiders own just over 70% of the Company’s outstanding shares and that’s rarely ever seen. Meaning, Management definitely believes there’s much more growth and much higher levels ahead for the Company and its stock.”


Howeverand when Ubiquiti Networks was later CFO-less, the Companyreported alarge and embarrassing lost ($47 million)due to fraud.Perhaps thats why Ilya Kundozerov, an analyst at Morningstar Equity Research, has just stated: Ubiquiti is easy to poke holes in (And regarding the Citron Research: This is what [Andrew Left] does).

Either way, Citron Research identified the following red flags as to why they think Ubiquiti Networks is a fraud:

#1. CEO used the fraud death word on last conference call (What [CEO] Pera calls misunderstood, we call corporate fraud. These warnings are obvious not just to a savvy investor but to any reader capable of critical thought.) Red Flag #2: Operating Metrics Red Flag #3: The Secret Sauce (In the case of Ubiquiti, the sauce is the Ubiquiti Community or as Pera has frequently described it: the evangelical community) Red Flag #4: Shady Distributors Red Flag #5: The Cash (Like many of the frauds that Citron has uncovered in the past, the cash balances claimed by Ubiquiti do not generate reconcilable interest income) Red Flag #6: Corporate Turnover (This mysterious cash theory is supported by Ubiquitis inability to keep a CFO (havent had one for two years)) Red Flag #7: The Most Important of All Corporate Culture


Citron Research also had this intriguing tidbit to say about the CEO which may be the only new thing revelation:

Next month Robert Peras option to buy the remaining part of the Memphis Grizzlies that he does not own expires if not exercised. If he chooses to complete the transaction (and he has never given any public indication that he will not), he will need over $200 million for which he will have to tap into his stock and the NBA will have to approve it. We believe that the NBA will take a more detailed look at the financial stability of Mr. Pera.

Naturally, the Citron Research report will trigger a rash of further popshots and drivebys by so-called shareholder rights law firms.

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