Sensata Technologies has had an impressive run over the past six months as its shares have beaten the S&P 500 by 19.9%. The stock now trades at $45.19, marking a 28.3% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Sensata Technologies, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Sensata Technologies Will Underperform?
Despite the momentum, we’re swiping left on Sensata Technologies for now. Here are three reasons why there are better opportunities than ST, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Sensata Technologies’s sales grew at a mediocre 3% compounded annual growth rate over the last five years. This was below our standard for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Sensata Technologies’s revenue to rise by 4.2%. Although this projection indicates its newer products and services will fuel better top-line performance, it is still below average for the sector.
3. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.
Sensata Technologies’s gross margin is one of the worst in the semiconductor industry, signaling it operates in a competitive market and lacks pricing power. As you can see below, it averaged a 29.2% gross margin over the last two years. Said differently, Sensata Technologies had to pay a chunky $70.80 to its suppliers for every $100 in revenue.
Final Judgment
Sensata Technologies falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 12.3× forward P/E (or $45.19 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
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