Marcus & Millichap’s 17.5% return over the past six months has outpaced the S&P 500 by 5.6%, and its stock price has climbed to $31.10 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 Marcus & Millichap, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Marcus & Millichap Will Underperform?
Despite the momentum, we’re passing on Marcus & Millichap for now. Here are three reasons why there are better opportunities than MMI, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Marcus & Millichap’s demand was weak and its revenue declined by 1.5% per year. This wasn’t a great result and signals it’s a low quality business.
2. Cash Flow Margin Set to Decline
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.
Over the next year, analysts predict Marcus & Millichap’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 10.4% for the last 12 months will decrease to 3.5%.
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).
Unfortunately, Marcus & Millichap’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Marcus & Millichap doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 47.7× forward P/E (or $31.10 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of our top software and edge computing picks.
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