What a time it’s been for Proto Labs. In the past six months alone, the company’s stock price has increased by a massive 53.6%, setting a new 52-week high of $81.68 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Proto Labs, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Proto Labs Will Underperform?
Despite the momentum, we’re cautious about Proto Labs. Here are three reasons why PRLB doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Proto Labs’s 4.6% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the industrials sector.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Proto Labs, its EPS declined by 2.9% annually over the last five years while its revenue grew by 4.6%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Proto Labs’s five-year average ROIC was negative 0.9%, meaning management lost money while trying to expand the business. Its returns were among the worst in the industrials sector.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Proto Labs, we’ll be cheering from the sidelines. After the recent surge, the stock trades at 40.3× forward P/E (or $81.68 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of our all-time favorite software stocks.
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