PacBio’s 38.9% return over the past six months has outpaced the S&P 500 by 28.4%, and its stock price has climbed to $2.06 per share. This performance may have investors wondering how to approach the situation.

Is now the time to buy PacBio, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think PacBio Will Underperform?

Despite the momentum, we don't have much confidence in PacBio. Here are three reasons we avoid PACB and a stock we'd rather own.

1. Revenue Tumbling Downwards

We at StockStory place the most emphasis on long-term growth, but within healthcare, a stretched historical view may miss recent innovations or disruptive industry trends. PacBio’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 4.5% over the last two years.

2. Cash Burn Ignites Concerns

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.

PacBio’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 130%, meaning it lit $130.40 of cash on fire for every $100 in revenue.

3. Restricted Access to Capital Increases Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

PacBio posted negative $155.8 million of EBITDA over the last 12 months, and its $645.8 million of debt exceeds the $298.7 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

We implore our readers to tread carefully because credit agencies could downgrade PacBio if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope PacBio can improve its profitability and remain cautious until then.

Final Judgment

PacBio doesn’t pass our quality test. With its shares beating the market recently, the stock trades at $2.06 per share (or a forward price-to-sales ratio of 3.7×). The market typically values companies like PacBio 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. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.

Stocks We Would Buy Instead of PacBio

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