The past six months have been a windfall for NOV’s shareholders. The company’s stock price has jumped 45.4%, hitting $19.13 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
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Why Do We Think NOV Will Underperform?
Despite the momentum, we're cautious about NOV. Here are three reasons we avoid NOV and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance can give signals about its business quality. Even a bad business, especially in a cyclical industry, can shine for a year or so, but a top-tier one should exhibit resilience through cycles. Unfortunately, NOV’s 7.5% annualized revenue growth over the last five years was tepid. This was below our standard for the energy upstream and integrated energy sector.
2. Low Gross Margin Reveals Weak Structural Profitability
While energy gross margins can be distorted by commodity prices, hedging, and short-term cost swings, sustained margins across a full cycle reflect a producer’s underlying asset quality, infrastructure position, and cost structure.
NOV, which averaged 20.2% 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. 
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.
NOV 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 3.6%, below what we’d expect for an upstream and integrated energy business.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of NOV, we’ll be cheering from the sidelines. After the recent rally, the stock trades at 19.3× forward P/E (or $19.13 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at the most dominant software business in the world.
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