What a brutal six months it’s been for QuidelOrtho. The stock has dropped 40.6% and now trades at $16.68, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy QuidelOrtho, 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 QuidelOrtho Will Underperform?
Even though the stock has become cheaper, we’re swiping left on QuidelOrtho for now. Here are three reasons you should be careful with QDEL, plus one stock we’d rather own.
1. Declining Constant Currency Revenue, Demand Takes a Hit
We can better understand Medical Devices & Supplies - Imaging, Diagnostics companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of QuidelOrtho’s control and are not indicative of underlying demand.
Over the last two years, QuidelOrtho’s constant currency revenue averaged 3.4% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests QuidelOrtho might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, QuidelOrtho’s margin dropped by 23 percentage points over the last five years. This along with its unexciting margin puts the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of a big investment cycle. QuidelOrtho’s free cash flow margin for the trailing 12 months was negative 6%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, QuidelOrtho’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We see the value of companies making people healthier, but in the case of QuidelOrtho, we’re out. Following the recent decline, the stock trades at 8.7× forward P/E (or $16.68 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
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