nLIGHT has been on fire lately. In the past six months alone, the company’s stock price has rocketed 67.9%, reaching $18.70 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? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think nLIGHT Will Underperform?
We’re happy investors have made money, but we're swiping left on nLIGHT for now. Here are three reasons why we avoid LASR and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, nLIGHT grew its sales at a sluggish 2.9% compounded annual growth rate. This fell short of our benchmarks. 
2. Free Cash Flow Margin Dropping
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.
As you can see below, nLIGHT’s margin dropped by 5.7 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s in the middle of a big investment cycle. nLIGHT’s free cash flow margin for the trailing 12 months was negative 2.9%.
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. Unfortunately, nLIGHT’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
nLIGHT doesn’t pass our quality test. After the recent surge, the stock trades at $18.70 per share (or a forward price-to-sales ratio of 4.1×). The market typically values companies like nLIGHT based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d recommend looking at the most dominant software business in the world.
Stocks We Like More Than nLIGHT
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