Soho House has been on fire lately. In the past six months alone, the company’s stock price has rocketed 45.9%, reaching $8.90 per share. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Soho House, 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 for active Edge members.
Why Is Soho House Not Exciting?
We’re happy investors have made money, but we're swiping left on Soho House for now. Here are three reasons there are better opportunities than SHCO and a stock we'd rather own.
1. Weak Growth in Members Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Soho House, our preferred volume metric is members). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Soho House’s members came in at 267,494 in the latest quarter, and over the last two years, averaged 4.8% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Cash Burn Ignites Concerns
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.
While Soho House posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, Soho House’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 2%, meaning it lit $2.01 of cash on fire for every $100 in revenue.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Soho House’s $853.4 million of debt exceeds the $146.6 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $137.6 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Soho House could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Soho House can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Soho House’s business quality ultimately falls short of our standards. After the recent surge, the stock trades at 14.5× forward EV-to-EBITDA (or $8.90 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward a top digital advertising platform riding the creator economy.
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