nLIGHT has been on fire lately. In the past six months alone, the company’s stock price has rocketed 122%, reaching $71.28 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy nLIGHT, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is nLIGHT Not Exciting?
We’re happy investors have made money, but we don't have much confidence in nLIGHT. Here are three reasons why LASR doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, nLIGHT’s 3.2% annualized revenue growth over the last five years was sluggish. This was below our standard for the industrials sector.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
While nLIGHT posted positive free cash flow this quarter, the broader story hasn’t been so clean. nLIGHT’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 4.7%, meaning it lit $4.73 of cash on fire for every $100 in revenue.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, nLIGHT’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
nLIGHT isn’t a terrible business, but it isn’t one of our picks. Following the recent rally, the stock trades at 227.3× forward P/E (or $71.28 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.
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