Over the last six months, Proto Labs’s shares have sunk to $39.05, producing a disappointing 10.4% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is now the time to buy Proto Labs, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Proto Labs Will Underperform?
Despite the more favorable entry price, we don't have much confidence in Proto Labs. Here are three reasons why you should be careful with PRLB and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Proto Labs grew its sales at a sluggish 1.6% compounded annual growth rate. This was below our standards. 
2. Shrinking Operating Margin
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.
Analyzing the trend in its profitability, Proto Labs’s operating margin decreased by 7.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Proto Labs’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 3.5%.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Proto Labs, its EPS declined by 10.5% annually over the last five years while its revenue grew by 1.6%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
We see the value of companies helping their customers, but in the case of Proto Labs, we’re out. After the recent drawdown, the stock trades at 26.3× forward P/E (or $39.05 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find better investment opportunities elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Like More Than Proto Labs
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