What a time it’s been for IPG Photonics. In the past six months alone, the company’s stock price has increased by a massive 51.7%, reaching $125.33 per share. This run-up might have investors contemplating their next move.
Is there a buying opportunity in IPG Photonics, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think IPG Photonics Will Underperform?
We’re glad investors have benefited from the price increase, but we don’t have much confidence in IPG Photonics. Here are three reasons why IPGP doesn’t excite us, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. IPG Photonics’s demand was weak over the last five years as its sales fell at a 4.3% annual rate. This wasn’t a great result and signals it’s a low quality business. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Operating Losses Sound the Alarm
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
IPG Photonics’s high expenses have contributed to an average operating margin of negative 11.1% over the last two years. Unprofitable semiconductor companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.
3. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for IPG Photonics, its EPS declined by 19.8% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
IPG Photonics doesn’t pass our quality test. Following the recent rally, the stock trades at 63.7× forward P/E (or $125.33 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
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