Shareholders of PacBio would probably like to forget the past six months even happened. The stock dropped 20.5% and now trades at $1.29. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy PacBio, 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 Is PacBio Not Exciting?
Even with the cheaper entry price, we’re passing on PacBio for now. Here are three reasons why PACB doesn’t excite us, plus one stock we’d rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but within healthcare, a stretched historical view may miss new innovations or demand cycles. PacBio’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 8.2% over the last two years. 
2. Cash Burn Ignites Concerns
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.
PacBio’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 131%, meaning it lit $131.07 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
PacBio burned through $123.4 million of cash over the last year, and its $706.1 million of debt exceeds the $236.9 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the PacBio’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of PacBio until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
PacBio isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at $1.29 per share (or a forward price-to-sales ratio of 2.5×). The market typically values companies like PacBio based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. Let us point you toward the most entrenched endpoint security platform on the market.
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