What a brutal six months it’s been for Advanced Energy. The stock has dropped 21.5% and now trades at $85.29, rattling many shareholders. This might have investors contemplating their next move.
Is now the time to buy Advanced Energy, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why AEIS doesn't excite us and a stock we'd rather own.
Why Do We Think Advanced Energy Will Underperform?
Pioneering technologies for radio frequency power delivery, Advanced Energy (NASDAQ: AEIS) provides power supplies, thermal management systems, and measurement and control instruments for various manufacturing processes.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Advanced Energy’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 10.4% over the last two years. Advanced Energy isn’t alone in its struggles as the Electronic Components industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time. 
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, Advanced Energy’s margin dropped by 6.7 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Advanced Energy’s free cash flow margin for the trailing 12 months was 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).
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, Advanced Energy’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Advanced Energy falls short of our quality standards. After the recent drawdown, the stock trades at 17.5× forward price-to-earnings (or $85.29 per share). This valuation tells us a lot of optimism is priced in - we think there are better investment opportunities out there. We’d recommend looking at a top digital advertising platform riding the creator economy.
Stocks We Like More Than Advanced Energy
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