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Aruba Networks, Inc. (ARUN), Ruckus Wireless Inc (RKUS), Ubiquiti Networks Inc (UBNT): No Bargains in Wi-Fi Solutions Providers

After recent weakness in the Wi-Fi solutions providers, do any of the stocks provide bargains now? Both Aruba Networks, Inc. (NASDAQ:ARUN) and Ruckus Wireless Inc (NYSE:RKUS) have been absolutely crushed recently while Ubiquiti Networks Inc (NASDAQ:UBNT) has been the lone winner in the sector. One big question is whether the big boy in wireless network gear, Cisco Systems, Inc. (NASDAQ:CSCO) has returned to reclaim market share in the sector.

Through most of the last 5 – 10 years, the sectors where Cisco Systems competes saw new technology leaders constantly chip away at the market share leader as it focused on a vast array of sectors. This allowed wireless network equipment providers such as Aruba Networks to gain market share.

The sector is vast including providers focused on enterprise networks bombarded by workers bringing wireless devices, or the concept BYOD (bring your own device), to municipalities and event venues looking for quality service required by customers.

Reviewing the stocks

Aruba Networks, Inc. (NASDAQ:ARUN) is now only worth $1.5 billion after losing 50% of its value in the last two months. The provider of network access solutions for the mobile enterprise announced in early May that results for the quarter ending April 30 would be below expectations. The shocking part is that earnings went from guidance of approximately $0.20 to only $0.11.

The main reason for missing estimates was a challenging economic environment pushing out customer orders around the globe. Analysts expect revenue growth in the 16-17% range over the next couple of years with earnings only flat in the year ending in July. With the stock trading at 15 times forward estimates, it doesn’t provide much of a bargain.

Ruckus Wireless Inc (NYSE:RKUS) was a hot IPO at the end of 2012 with the stock doubling in months, yet it now trades below the opening price. The company is a leader in carrier-class Wi-Fi solutions with products that include gateways, access points, and controllers.

Unfortunately for investors, Ruckus Wireless Inc (NYSE:RKUS) is worth nearly $1 billion though the expectations are now that earnings will plunge the next couple of years with only $0.27 slated for 2014. Revenue growth is expected to accelerate next year to nearly 25% growth, yet the margins won’t match those of 2012.

Ubiquiti Networks Inc (NASDAQ:UBNT) is surprisingly now the largest stock in the group with a market cap of nearly $1.7 billion. Possibly the reasoning is that the stock crashed earlier than the group when it dropped from $35 to $7.50 back in the summer of 2012.

As with the group, earnings growth has stalled with analysts now expecting a drop in fiscal year 2013 and fiscal year 2014 only roughly matching the 2012 earnings of $1.09. Even without earnings growth, the stock trades for nearly 18 times those forward earnings and over 4 times revenue.

Bottom line

As with all telecommunications solutions providers, the revenue is dependent on carriers with weak balance sheets and constant periods of pushing out deployments. The demand for Wi-Fi solutions should only grow over time, but it doesn’t appear that any of these stocks are worth paying up for that growth. All three stocks expect limited earnings growth over the next couple of years while in most cases growing revenue. This scenario shows the industry is overly competitive from either a stronger Cisco Systems, Inc. (NASDAQ:CSCO) in the case of Aruba Networks, Inc. (NASDAQ:ARUN) or counterfeiting in China with Ubiquiti Networks Inc (NASDAQ:UBNT). Investors should avoid this sector for now.

The article No Bargains in Wi-Fi Solutions Providers originally appeared on Fool.com and is written by Mark Holder.

Mark Holder and Stone Fox Capital Advisors, LLC has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Ruckus Wireless. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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