Why Ubiquiti, Inc. Rallied Almost 40% in February

Shares of Ubiquiti, Inc. (NYSE: UI) rallied 39.1% in February, according to data from S&P Global Market Intelligence.

Ubiquiti was the target of a short-seller report in late January, which may have increased short interest in the stock just before earnings.

Unfortunately for those short-sellers, Ubiquiti went on to deliver a terrific earnings report, beating analyst expectations by a significant amount. That beat may have forced a short squeeze, sending shares higher.

A small float can lead to big swings

Ubiquiti is unique among public companies in that its founder and CEO, Robert Pera, owns 93% of the shares outstanding, which leaves a very small public float, even though Ubiquiti's market cap has surged to $47 billion as of this writing.

At the end of January, a short-selling fund called Hunterbrook Capital disclosed it was short Ubiquiti shares. The crux of Hunterbrook's short case was that Ubiquiti equipment was being routed through distributors into Russia for use in Russia's military communications, in violation of sanctions. Then, in early February, Hunterbrook published a second piece, claiming Ubiquiti equipment was used at Jeffrey Epstein's island and Sean "P-Diddy" Combs' house.

Ubiquiti makes high-performance networking gear that is easy to use and has strong privacy features, which are, of course, features all customers want -- even criminals. In addition, Ubiquiti sells to distributors worldwide, so secondary or multiple levels of resales may be hard to track.

But again, these claims are coming from a motivated short-seller, and it's pretty unclear if Ubiquiti is even liable if its equipment somehow made it into the hands of bad actors. Ubiquiti has been shorted a few times in the past, but these short attacks never stuck; in fact, Ubiquiti shares hit an all-time high late last year.

Image source: Getty Images.

Hunterbrook isn't having a good go of it either, as Ubiquiti subsequently reported exceptional fiscal second-quarter earnings. Revenue surged 35.8% year-over-year to $814.9 million, while adjusted (non-GAAP) earnings per share surged 70.2% to $3.88, beating expectations by a whopping $0.80.

The earnings report came out on Feb. 6, at which time about 540,000 shares were sold short. That's a small percentage of overall shares, but it's over 11% of the tiny public float. As such, solid earnings may have triggered some short-covering and contributed to the magnitude of February's gains.

Ubiquiti is a high-priced stock, but it could get taken out

As of today, Ubiquiti trades at a rather high 54 times earnings. Yet while that looks expensive, the company is still growing at a fast clip, expanding margins, and has paid down all the debt it took on immediately after the pandemic. So, the stock may be fairly valued if management can keep up growth and withstand short-seller attacks.

With just a tiny percentage of shares available to the public, this investor wouldn't be surprised if Pera decided to buy out public shareholders at some point. The question is, at what price?

Billy Duberstein and/or his clients have positions in Ubiquiti. The Motley Fool recommends Ubiquiti. The Motley Fool has a disclosure policy.