Ubiquiti Crisis - Plunging Stock, Lawsuit and AccusationsBy: John Honovich, Published on May 22, 2012
Things are getting worse for Ubiquiti. What started as a shocking and seemingly fabricated story about the Chinese mafia has evolved into a lawsuit, more serious allegations and a plunging stock price. Inside this note, we examine the details of recent events and their potential to undermine Ubiquiti's place in the wireless and surveillance markets.
Ubiquiti has filed a lawsuit against a number of people, including those they claim fabricated the Chinese mob hit, accusing them of 'masterminding an international counterfeiting ring.' While you can read all the gory details in the court filing, a few points stand out:
- The counterfeit products allegedly have an alarmingly high failure rate of 12%, according to Ubiquiti's claim.
- Since the counterfeit products look nearly identical to real ones, Ubiquiti has been honoring warranties on them to minimize customer ill will, at a loss to the company.
- Millions of dollars of Ubiquiti's products have been counterfeited. Ubiquiti claims that in October 2011 alone, a million dollars of fake products were shipped.
- The counterfeiting continues with 5,900 fake Ubiquiti products discovered recently in Argentinian customs.
The biggest operational issue we see is the costs of ongoing counterfeiting - lost revenue, increased service, damaged goodwill, etc. While Ubiquiti is a large, now doing hundreds of millions in revenue, having even a few million dollars of counterfeit products could be a significant problem.
A blog attacking Ubiquiti has been created by one of the people Ubiquiti alleges is involved in the counterfeiting ring. The central allegation is that Ubiquiti knowingly sold to Iran on an ongoing basis. The problem here is that the US government has sanctions against Iran that carry potential criminal penalties including "a fine up to $1,000,000, and natural persons may be imprisoned for up to 20 years."
While we do not know the specifics of the sanctions or how Ubiquiti would fall under this law, even these allegation's existence can create problems. For instance, the blog shares screenshots showing what seem to be a signed contract from a Ubiquiti executive authorizing resale into Iran as well as emails OKing it.
Ubiquiti will need to sort this out quickly - Did they sell/resell to Iran? Did they do it knowingly? Does their actions violate US sanctions? Even if they are innocent, having this over their heads is not good. However, if they are at fault, the consequences could be quite severe.
Ubiquiti dealt with similiar Iran allegations during their IPO. According to Reuters, Ubiquiti's explanation was that they did not know its products could not be sold into Iran until March 2010 and that, since then, they had taken steps to stop exports to Iran.
Plunging Stock Price
While a short drop in stock price is expected after the sensational Chinese mafia allegations, the stock price's continued steady fall - from a peak of $35 to under $20 - a fall of more than 40% - is more troubling.
[Update May 30th - the stock has fell another 12% is now down to $17.50 - a total drop in May of half their valuation.]
In terms of market capitalization, that is a decline of over $1 Billion - a massive amount given the allegations.
It is hard to divine why the stock price continues to go down:
- Best case scenario, investors are simply spooked (i.e., herd behavior) and will come back when the noise dissipates
- Worst case scenario, well-informed investors see serious problems with the company (i.e., the smart money) and are staying away
Ubiquiti already is a major player in the wireless surveillance market and has the potential to become one in surveillance cameras. However, if the counterfeiting problem, Iranian allegations and plunging stock price continue, it will inevitably create operational problems for the company that could harm their product development and future growth. While the video of a Ubiquiti rival trashing their own office might be initially humorous, this situation is not. Ubiquiti needs to resolve it asap.