What a fantastic six months it’s been for Proto Labs. Shares of the company have skyrocketed 55.8%, setting a new 52-week high of $93.20. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Proto Labs, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Proto Labs Not Exciting?
We’re glad investors have benefited from the price increase, but we’re cautious about Proto Labs. Here are three reasons we avoid PRLB, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Proto Labs’s 4.4% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the industrials sector.
2. Breakeven Operating Margin Raises Questions
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Proto Labs’s operating margin has risen over the last 12 months, leading to break even profits over the last five years. However, its large expense base and inefficient cost structure mean it still sports inadequate profitability for an industrials business. This result is surprising given its high gross margin as a starting point.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Proto Labs’s five-year average ROIC was negative 1.2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the industrials sector.
Final Judgment
Proto Labs isn’t a terrible business, but it isn’t one of our picks. After the recent surge, the stock trades at 39× forward P/E (or $93.20 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at our favorite semiconductor picks and shovels play.
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