Over the past six months, Advanced Energy has been a great trade, beating the S&P 500 by 12.7%. Its stock price has climbed to $134.91, representing a healthy 17.3% increase. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Advanced Energy, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Advanced Energy Will Underperform?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons why we avoid AEIS and a stock we'd rather own.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Advanced Energy’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 8.8% over the last two years. Advanced Energy isn’t alone in its struggles as the Electronic Components industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time. 
2. Free Cash Flow Margin Dropping
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.
As you can see below, Advanced Energy’s margin dropped by 6.6 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Advanced Energy’s free cash flow margin for the trailing 12 months was 6.3%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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. Over the last few years, Advanced Energy’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
Advanced Energy falls short of our quality standards. With its shares beating the market recently, the stock trades at 26.4× forward P/E (or $134.91 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at our favorite semiconductor picks and shovels play.
Stocks We Like More Than Advanced Energy
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