DaVita has had an impressive run over the past six months as its shares have beaten the S&P 500 by 12.5%. The stock now trades at $150.12, marking a 15.9% gain. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in DaVita, 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 Is DaVita Not Exciting?
We’re happy investors have made money, but we don't have much confidence in DaVita. Here are three reasons we avoid DVA and a stock we'd rather own.
1. Sales Volumes Stall, Demand Waning
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Outpatient & Specialty Care company because there’s a ceiling to what customers will pay.
Over the last two years, DaVita failed to grow its treatments, which came in at 7.26 million in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests DaVita might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect DaVita’s revenue to rise by 2.5%, a deceleration versus its 3.4% annualized growth for the past five years. This projection doesn't excite us and indicates its products and services will face some demand challenges.
3. 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, DaVita’s margin dropped by 1.5 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. DaVita’s free cash flow margin for the trailing 12 months was 9.6%.
Final Judgment
DaVita isn’t a terrible business, but it doesn’t pass our bar. With its shares beating the market recently, the stock trades at 10.9× forward P/E (or $150.12 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at the most entrenched endpoint security platform on the market.
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