What a fantastic six months it’s been for ProFrac. Shares of the company have skyrocketed 67%, hitting $7.20. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy ProFrac, 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 Is ProFrac Not Exciting?
We’re happy investors have made money, but we're swiping left on ProFrac for now. Here are three reasons you should be careful with ACDC and a stock we'd rather own.
1. Low Gross Margin Reveals Weak Structural Profitability
In a single quarter or year, gross margins in the sector can swing wildly due to commodity prices, hedging, or changes in labor costs. Over a multi-year period across different points in the cycle, gross margin differences can signal whether a company is a structurally-advantaged producer (“rock” quality, takeaway, operating costs) or not.
ProFrac, which averaged 32.8% gross margin over the last five years, exhibiting bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins. 
2. Shrinking EBITDA Margin
Adjusted EBITDA margin is an important measure of profitability for the sector and accounts for the gross margins and operating costs mentioned previously. Unlike operating margin, it is not distorted by accounting conventions around reserves, drilling costs, and assumptions on commodity consumption from the well or basin. Adjusted EBITDA highlights the economic reality of how much cash the rock produces before the capital structure (debt service) and the drilling budget (capex) are considered.
Analyzing the trend in its profitability, ProFrac’s EBITDA margin decreased by 1.6 percentage points over the last year. ProFrac’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 EBITDA margin for the trailing 12 months was 16%.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
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.
ProFrac has shown weak cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 4.3%, below what we’d expect for an upstream and integrated energy business.
Final Judgment
ProFrac isn’t a terrible business, but it doesn’t pass our quality test. After the recent surge, the stock trades at 9.5× forward EV-to-EBITDA (or $7.20 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d recommend looking at the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of ProFrac
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