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Ubiquiti Plunges 25% on SEC Probe into Business Practices

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Ubiquiti Networks, Inc.  stunned its shareholders yesterday with the news that the company and some of the company's executives have been subpoenaed by the U.S. Securities and Exchange Commission (SEC). The wireless equipment player’s shares slipped more than 25%, as investors abandoned the stock in droves following the probe into its business and accounting practices.

Of late, Ubiquiti’s shares have been volatile and lost 16% over the past six months. This is in stark contrast to its industry, which has rallied 16.7% on an average, during the same time frame.

The SEC Probe

According to a regulatory filing dated Feb 13, the agency has issued subpoenas to Ubiquiti and a few of its officers, “requesting documents and information relating to a range of topics, including metrics relating to the Ubiquiti Community, accounting practices, financial information, auditors, international trade practices, and relationships with distributors and various other third parties.”

Several securities litigation firms, which include Kaplan Fox & Kilsheimer LLP, Glancy Prongay & Murray LLP, Holzer & Holzer, LLC and Block & Leviton LLP, have launched investigations on behalf of Ubiquiti’s shareholders related to the company and its officers’ possible violations of federal securities laws.

Per a spokesperson, Ubiquiti is in the process of responding to SEC’s requests and intends to cooperate fully with the agency.

What It Means for Ubiquiti

The subpoenas mark the second setback for Ubiquiti's shares this month, coming on the heels of a tough quarterly report earlier in February.

In all fairness, the subpoenas don't automatically mean that Ubiquiti is in the wrong. It is not clear what led the SEC to take this action. However, what’s disturbing is that less than six months ago, Citron Research had charged the company of fraud and questioned the integrity of distributors, high margins, corporate culture and cash balances. The company’s CEO Robert Pera vehemently denied these allegations.

Investors will just have to wait and see what the reason behind the SEC probe actually is.

The Other Setback

On Feb 8, shares of Ubiquiti tumbled 14% in response to mixed fiscal second-quarter results. The company’s earnings missed estimates by 6.2%, putting an end to its three-quarter earnings beat streak.

Ubiquiti’s quarterly results suffered from gross margin headwinds, as strong demand for core networking portfolio was eclipsed by $18.6 million booked as provisions for obsolete inventory, vendor deposits, and losses on purchase commitments. The losses on purchase commitments resulted from weak sales of the new FrontRow wearable cameras. Also, investors were disappointed with the outlook, which seemed weak considering that demand for several of the company’s new product offerings continues to grow.

Ubiquiti clearly faces an uphill battle in persuading investors that things are going to be fine for the company in the near future.

Ubiquiti has a Zacks Rank #3 (Hold) and competes with players like Cisco Systems, Inc. (CSCO - Free Report) , the Aruba arm of Hewlett Packard Enterprise Company (HPE - Free Report) , Brocade Communications Systems, Inc. and Huawei. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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