Despite Its High P/E Ratio, Is Ubiquiti Networks, Inc. (NASDAQ:UBNT) Still Undervalued?

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Ubiquiti Networks, Inc.’s (NASDAQ:UBNT) P/E ratio and reflect on what it tells us about the company’s share price. Looking at earnings over the last twelve months, Ubiquiti Networks has a P/E ratio of 29.93. That means that at current prices, buyers pay $29.93 for every $1 in trailing yearly profits.

See our latest analysis for Ubiquiti Networks

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Ubiquiti Networks:

P/E of 29.93 = $133.03 ÷ $4.44 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

In the last year, Ubiquiti Networks grew EPS like Taylor Swift grew her fan base back in 2010; the 87% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 20% per year. With that kind of growth rate we would generally expect a high P/E ratio.

How Does Ubiquiti Networks’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (29) for companies in the communications industry is roughly the same as Ubiquiti Networks’s P/E.

NasdaqGS:UBNT Price Estimation Relative to Market, July 8th 2019
NasdaqGS:UBNT Price Estimation Relative to Market, July 8th 2019

Its P/E ratio suggests that Ubiquiti Networks shareholders think that in the future it will perform about the same as other companies in its industry classification.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does Ubiquiti Networks’s Debt Impact Its P/E Ratio?

Ubiquiti Networks’s net debt is 1.0% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Bottom Line On Ubiquiti Networks’s P/E Ratio

Ubiquiti Networks’s P/E is 29.9 which is above average (18.2) in the US market. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So to be frank we are not surprised it has a high P/E ratio.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Ubiquiti Networks may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.