Purple’s stock price has taken a beating over the past six months, shedding 77.3% of its value and falling to $3.75 per share. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Purple, 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 Do We Think Purple Will Underperform?
Despite the more favorable entry price, we’re passing on Purple for now. Here are three reasons we avoid PRPL, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Purple’s demand was weak and its revenue declined by 9.1% per year. This was below our standards and is a sign of poor business quality.
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, Purple’s ROIC averaged 1.9 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
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.
Purple’s $235.2 million of debt exceeds the $23.3 million of cash on its balance sheet. Furthermore, its 34× net-debt-to-EBITDA ratio (based on its EBITDA of $6.32 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. Purple 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 Purple can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Purple, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 12.6× forward EV-to-EBITDA (or $3.75 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.
Stocks We Would Buy Instead of Purple
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