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Sep 18, 2017

S3 Analytics: Ubiquiti Networks Down 10% on Citron Research Report

Andrew Left, of Citron Research, has posted a negative research report on its website on wireless network technology manufacturer Ubiquiti Networks Inc. (UBNT). The stock fell as much as 13% just after the open, but has since recovered and is now down only 10%. Citron is claiming the company is a “total fraud” with supposed “competitive advantage” that produces outsized operating margins and ROE in comparison to its rivals Cisco, HP, Netgear and Brocade. Ubiquiti’s CEO Robert Pera has declined to comment on the report.

UBNT’s short interest is $393 million, down 1% for the year but down $184 million, or 31%, since its historical high of $585 million on August 7th.

Short sellers were down $27 million in 2017 mark to market losses prior to today’s price move. Shorts made back $40 million in mark to market profits this morning and are now up $13 million year to date.

Future UBNT short selling will be constrained by lack of borrow supply. Stock borrow rates have climbed from general collateral levels, the cheapest borrow cost on the easiest to borrow stocks, to 16% fee is early August and back down to 6-7% fee today as shorts covered more than 2 million shares over the last month. We’ve seen over 1 million shares of new short selling today, leaving approximately 2 million shares left to borrow and short. Stock borrow supply is severely limited due to CEO Robert Pera owning 70% of the float. It is a certainty that Pera’s 56.3 million shares will never be released into the stock lending pool to facilitate short selling in his company.

With less than 20% of today’s trading volume coming from short sellers, today’s price drop is mainly due to long shareholders exiting their positions on the heels of Citron’s research report. We should see continued short selling this week, based on today’s surge in stock borrow demand, but short selling pressure will wane in the near future as borrow supply diminishes and stock borrow rates increase. Further stock price pressure in UBNT will continue to be long shareholder based as there will not be enough short activity to influence its share price.

Another day or two of active short selling will push stock borrow rates over the 10% fee level and shorts will be paying over $110 thousand per day to finance their short positions. As of now, there are very few recalls hitting the street, but increased lender long selling may negatively affect the stock borrow supply and help drive up UBNT stock borrow rates even quicker.

Fundamental short sellers, who have been long term shorts of UBNT, will continue to hold onto their positions and try to make up some of their $251 million of losses incurred in 2016. However, if UBNT’s stock price rebounds strongly off today’s lows and UBNT’s stock borrow costs increases there is a good chance that short term momentum short sellers will quickly exit their positions and cut their losses if the price moves higher. Although if UBNT’s stock price remains weak, expect short interest to build and hit the $500 million mark once again.

Want deeper insight into the above analysis? Contact: 
Managing Director Predictive Analytics, S3 Partners
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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