Over the last six months, IPG Photonics’s shares have sunk to $68.94, producing a disappointing 15.2% loss while the S&P 500 was flat. This might have investors contemplating their next move.
Is now the time to buy IPG Photonics, 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 IPG Photonics Will Underperform?
Even with the cheaper entry price, we're cautious about IPG Photonics. Here are three reasons why we avoid IPGP and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. IPG Photonics struggled to consistently generate demand over the last five years as its sales dropped at a 5.3% annual rate. This was below our standards and is a sign of poor business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, IPG Photonics’s operating margin decreased by 42.4 percentage points over the last five years. IPG Photonics’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 23.7%.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for IPG Photonics, its EPS declined by 19.8% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
We cheer for all companies solving complex technology issues, but in the case of IPG Photonics, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 42.7× forward P/E (or $68.94 per share). At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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