Fundamental Short Selling Research

Eric Fernandez, CFA

TwoRiversAnalytics

Equity Bottom-Up

<ul>
<li>This model uncovers companies facing recent sharp cuts in estimates. These shorts can have very disparate characteristics.</li>
<li>The key judgement involves whether the negative revisions are temporary or if they are indications of ongoing weakness in the business. </li>
<li>Breaking Estimates stocks often continue to decline after the cuts.  This week we flag:  Nutanix, Upstart, Ubiquiti, Corsair Gaming</li>
</ul>


This model uncovers companies facing recent sharp cuts in estimates. These shorts can have very disparate characteristics.
The key judgement involves whether the negative revisions are temporary or if they are indications of ongoing weakness in the business. 
Breaking Estimates stocks often continue to decline after the cuts.  This week we flag:  Nutanix, Upstart, Ubiquiti, Corsair Gaming


Breaking Estimate Short Candidates: Nutanix, Upstart, Ubiquiti, Corsair Gaming

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Hamed Khorsand

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Independent Stock Specific Research

BWS Financial Inc

BWS provides independent stock specific research focused on companies with distinct value that are going through a special situation where there is a tangible catalyst not priced in. The catalyst can be anything from new product, restructuring, M&A, management change, change in business strategy, etc. BWS’s focus is to understand the change and evaluate the potential return for investors.

BWS utilizes a self formed proprietary approach in discovering stocks by putting great emphasis on deep research. BWS does generate short recommendations following a similar criteria.

<ul>
<li>The supply chain issues that became an obstacle for Ubiquiti (UI) have yet to abate. Ubiquiti missed fiscal third quarter (March) estimates with a meaningful decline in service provider revenue</li>
<li>The Company burned through inventory in the quarter and used its cash flow to aggressively repurchase shares</li>
<li>Ubiquiti’s foray into services should broaden the revenue stream and improve cash flow, but it could be another few quarters before this becomes a needle moving endeavor</li>
</ul>


The supply chain issues that became an obstacle for Ubiquiti (UI) have yet to abate. Ubiquiti missed fiscal third quarter (March) estimates with a meaningful decline in service provider revenue
The Company burned through inventory in the quarter and used its cash flow to aggressively repurchase shares
Ubiquiti’s foray into services should broaden the revenue stream and improve cash flow, but it could be another few quarters before this becomes a needle moving endeavor


<ul>
<li>UI continues to face supply chain challenges in meeting demand. Ubiquiti reported fiscal second quarter (December) results missing our estimates while inventory continued to increase</li>
<li>First, service provider revenue declined further after what we thought was a depressed level in the September quarter. Second, freight expenses caused gross margin to decline faster </li>
<li>Even though enterprise revenue rose sequentially in the quarter, it was not enough to offset the erosion in service provider revenue</li>
</ul>


UI continues to face supply chain challenges in meeting demand. Ubiquiti reported fiscal second quarter (December) results missing our estimates while inventory continued to increase
First, service provider revenue declined further after what we thought was a depressed level in the September quarter. Second, freight expenses caused gross margin to decline faster 
Even though enterprise revenue rose sequentially in the quarter, it was not enough to offset the erosion in service provider revenue


UI: Earnings Compression Before Price Inflation

<ul>
<li>The incident from earlier this year that caused UI's stock to decline by approximately 20 percent turned out not to be a hack. </li>
<li>The blog report and subsequent industry coverage the incident received resulted in investors fearing there was an inherent risk to using Ubiquiti’s devices.</li>
<li>The coverage this news is now receiving should result in customers once again evaluating Ubiquiti’s products on a broader scale.</li>
</ul>


The incident from earlier this year that caused UI's stock to decline by approximately 20 percent turned out not to be a hack. 
The blog report and subsequent industry coverage the incident received resulted in investors fearing there was an inherent risk to using Ubiquiti’s devices.
The coverage this news is now receiving should result in customers once again evaluating Ubiquiti’s products on a broader scale.


<ul type="disc"><li>
Ubiquiti (UI) reported fiscal first quarter (September) results where the component shortage and extended shipping delays resulted in revenue declining sequentially. Throughout the calendar year Ubiquiti had been successful dodging the supply chain bottlenecks crippling technology companies.</li></ul> <ul type="disc"><li>The revenue decline in the September quarter does not change our opinion on Ubiquiti’s business with the Company reporting an increase in finished goods inventory, which we assume is sitting on ships at sea waiting to unload.</li></ul> <ul type="disc"><li>Ubiquiti reported gross margin of 45.6 percent, which is the lowest gross margin in more than two years. Ubiquiti has decided not to pass through the price increases it has experienced. The enduring cost pressure builds customer loyalty and gives Ubiquiti a greater competitive advantage on price.</li></ul> <ul type="disc"><li>Ubiquiti disclosed it has repurchased approximately 31 thousand shares between October 3 and November 4 of this year. The Company usually buys back shares when business was growing and the stock was not depicting such success. It is for this reason we believe the ailment of the September quarter was due to product being at sea than actual dampening in demand.</li></ul>


Ubiquiti (UI) reported fiscal first quarter (September) results where the component shortage and extended shipping delays resulted in revenue declining sequentially. Throughout the calendar year Ubiquiti had been successful dodging the supply chain bottlenecks crippling technology companies. The revenue decline in the September quarter does not change our opinion on Ubiquiti’s business with the Company reporting an increase in finished goods inventory, which we assume is sitting on ships at sea waiting to unload. Ubiquiti reported gross margin of 45.6 percent, which is the lowest gross margin in more than two years. Ubiquiti has decided not to pass through the price increases it has experienced. The enduring cost pressure builds customer loyalty and gives Ubiquiti a greater competitive advantage on price. Ubiquiti disclosed it has repurchased approximately 31 thousand shares between October 3 and November 4 of this year. The Company usually buys back shares when business was growing and the stock was not depicting such success. It is for this reason we believe the ailment of the September quarter was due to product being at sea than actual dampening in demand.

UI: Enterprise Not Enough to Offset Service Provider

United States

Juniper Networks, Inc. provides Internet infrastructure solutions for Internet service providers and other telecommunications service providers.  The Company offers network infrastructure solutions that includes IP routing, Ethernet switching, security and application acceleration solutions.

F5 Networks, Inc. provides integrated Internet traffic management solutions designed to improve the availability and performance of mission-critical Internet-based servers and applications.  The Company's software-based solutions manage, control and optimize Internet traffic and content.  F5's solutions automatically deliver Internet content for service providers and e-businesses.

Ciena Corporation develops and markets communications network platforms and software, and offers professional services.  The Company's broadband access, data and optical networking platforms, software tools, and global network services support worldwide telecom and cable/MSO services providers, and enterprise and government networks.

EchoStar Corporation manufactures broadcast satellite receivers and antennas, and offers commercial satellite services.

InterDigital, Inc. develops technology for advanced digital wireless telecommunications applications.  The Company offers both time division multiple access and wide band code division multiple access proprietary and standards compliant digital wireless technology to customers, licensees, and companies.

Lumentum Holdings Inc. operates as a holding company. The Company, through its subsidiaries, supplies optical and photonic products. Lumentum Holdings serves data communications and telecommunications, networking, and life-sciences markets worldwide.

ViaSat, Inc. provides advanced broadband digital satellite communications and other wireless networking and signal processing equipment and services.  The Company's defense products include satellite communications products consisting of modems, terminals, and network control systems, advanced multifunction information distribution systems, and simulation test equipment.

Calix, Inc. provides communications access systems and software that enable communications service providers, or CSPs, to connect to their residential and business subscribers. The Company's products encompass its multiservice, multiprotocol access platform and its Ethernet service access platforms.

Viavi Solutions Inc. provides network and service enabling solutions and optical products. The Company offers installation, commissioning, scripting, custom analytics, integration, business intelligence consulting, operational assistance, field and lab testing, technical training, maintenance, and support services. Viavi Solutions serves customers worldwide.

Extreme Networks, Inc. provides switching solutions for local area networks (LAN).  The Company uses its custom ASICs and a common hardware, software, and management architecture to offer customers LAN solutions.

BYD Electronic International Co., Ltd. researches, develops, manufactures handset components such as handset casings and handset keypads and modules for handset manufacturers.  The Company also provides assembly services comprising assembly service and PCB assembly service to global handset manufacturers.

Accton Technology Corporation researches, develops, manufactures, and markets computer network system products such as adapters, hubs, switches, routers, and bridges. The Company also manufactures network computers and network peripheral equipment.

ZTE Corporation develops and markets switches, access servers, videoconferencing systems, mobile communication systems, data communication devices, and optical communication devices.  The Company also offers networking solutions for setup, refurbishment and optimization of networks.

Suzhou TFC Optical Communication Co., Ltd. researches, develops, and distributes fiber optic components.

Yealink Network Technology Corporation Limited operates as a communication equipment manufacturer. The Company provides telephones, unified communication terminals, video conferencing systems, conference phones, and other accessories. Yealink Network Technology serves customers worldwide.

Yealink Network Technology Cor (300628 CH)

Hengtong Optic-electric Co., Ltd. manufactures and distributes optical fiber and optical cables.

ITI Limited manufactures telecommunications products, including electronic switching equipment, telephones and related devices, digital radio, open wire bags, optical fiber equipment and digital exchanges.   The Group's customers include defense, railways and oil companies.

Guangzhou Haige Communications Group Inc Co develops and provides communication products and services.  The Company's products and services include digital communication system, internet communication system, and global positioning system navigation receiver.

Guangzhou Haige Cmncts Grp Inc Co (002465 CH)

China Zhenhua (Group) Science & Technology Co., Ltd. designs, manufactures, and markets electronic components, telecommunication equipment, and electric machines. The Company produces capacitors, integrated circuits, electric resistors, wireless phones, visual phones, and other products. China Zhenhua (Group) Science & Technology also invests in real estate businesses.

China Zhenhua (Group) Science & Tech (000733 CH)

Wistron NeWeb Corporation manufactures wireless communication systems.  The Company's products include satellite communication, wireless networking, embedded antenna, and mobile handset products.

Ubiquiti Inc. provides wireless networking products and solutions. The Company offers radios, antennas, and management tools that have been designed to deliver carrier class performance for wireless networking and other applications in the unlicensed radio frequency. Ubiquiti operates in the State of New York.

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Ubiquiti Inc. (UI US)

Breaking Estimate Short Candidates: Nutanix, Upstart, Ubiquiti, Corsair Gaming

This model uncovers companies facing recent declines in estimates. This week we flag: Nutanix, Upstart, Ubiquiti, Corsair Gaming

Eric Fernandez, CFA

UI: Shrinking Float Thru Buybacks

UI has been aggressively buying back stock resulting in a float that has shrunk meaningfully since last year. We anticipate a turnaround with...

BWS Financial Inc

UI: Earnings Compression Before Price Inflation

UI experienced a significant drop in operating margin due to lack of product available to ship and higher freight costs. Having more inventory to...

BWS Financial Inc

UI: Hack Update Points to Stock Upside

DOJ indicted an employee for stealing data and posing as a hacker to extort money. No hack ever occurred. We believe this news should be viewed as...

BWS Financial Inc

UI: Enterprise Not Enough to Offset Service Provider

UI ended FYQ1 with higher finished goods inventory than the June quarter leading us to believe UI has a large amount of product that has yet to...

BWS Financial Inc

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