Even though Getty Images (currently trading at $2.13 per share) has gained 6.5% over the last six months, it has lagged the S&P 500’s 22.9% return during that period. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Getty Images, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Is Getty Images Not Exciting?
We're swiping left on Getty Images for now. Here are three reasons you should be careful with GETY and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Getty Images’s sales grew at a sluggish 2.4% compounded annual growth rate over the last five years. This was below our standards.
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, Getty Images’s margin dropped by 12 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Getty Images’s free cash flow margin for the trailing 12 months was 1.4%.
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).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Getty Images’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Getty Images isn’t a terrible business, but it doesn’t pass our bar. With its shares trailing the market in recent months, the stock trades at 2.9× forward EV-to-EBITDA (or $2.13 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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