Liberty Broadband’s 32.7% return over the past six months has outpaced the S&P 500 by 27%, and its stock price has climbed to $100.80 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Liberty Broadband, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Liberty Broadband Not Exciting?

We’re glad investors have benefited from the price increase, but we're swiping left on Liberty Broadband for now. Here are three reasons why you should be careful with LBRDK and a stock we'd rather own.

1. Lackluster Revenue Growth

We at StockStory place the most emphasis on long-term growth, but within business services, a stretched historical view may miss recent innovations or disruptive industry trends. Liberty Broadband’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 2.7% over the last two years was well below its five-year trend.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Liberty Broadband’s margin dropped by 39.4 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because it’s already burning cash. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. Liberty Broadband’s free cash flow margin for the trailing 12 months was negative 11.7%.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Liberty Broadband burned through $121 million of cash over the last year, and its $4.09 billion of debt exceeds the $226 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Liberty Broadband’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Liberty Broadband until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

Liberty Broadband’s business quality ultimately falls short of our standards. With its shares beating the market recently, the stock trades at 57.5× forward EV-to-EBITDA (or $100.80 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. Let us point you toward the most entrenched endpoint security platform on the market.

Stocks We Like More Than Liberty Broadband

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