DigitalBridge has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 30% and now trades at $15.37. This run-up might have investors contemplating their next move.
Is now the time to buy DigitalBridge, 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 DigitalBridge Will Underperform?
Despite the momentum, we don't have much confidence in DigitalBridge. Here are three reasons you should be careful with DBRG and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years.
DigitalBridge struggled to consistently generate demand over the last five years as its revenue dropped at a 68.3% annual rate. This wasn’t a great result and is a sign of poor business quality.
Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.2. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for DigitalBridge, its EPS and revenue declined by 14.1% and 77.6% annually over the last two years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, DigitalBridge’s low margin of safety could leave its stock price susceptible to large downswings.
3. Restricted Access to Capital Increases Risk
DigitalBridge reported $382.5 million of cash and $298.8 million of debt on its balance sheet in the most recent quarter.
As investors in high-quality companies, we primarily focus on whether a company’s profits can support its debt.
With negative $44.42 million of EBITDA over the last 12 months, we view DigitalBridge’s 1.9× net-debt-to-EBITDA ratio as inadequate. The company’s lacking profits relative to its borrowings give it little breathing room, raising red flags.
Final Judgment
DigitalBridge falls short of our quality standards. With its shares beating the market recently, the stock trades at 2.2× forward P/E (or $15.37 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. Let us point you toward one of our top software and edge computing picks.
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