Hercules Capital (HTGC): Buy, Sell, or Hold Post Q4 Earnings?

Over the last six months, Hercules Capital’s shares have sunk to $15.54, producing a disappointing 13.6% loss - a stark contrast to the S&P 500’s 3.4% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Hercules Capital, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Hercules Capital Will Underperform?

Even though the stock has become cheaper, we don't have much confidence in Hercules Capital. Here are two reasons we avoid HTGC and a stock we'd rather own.

1. EPS Barely Growing

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.

Hercules Capital’s EPS grew at an unimpressive 6.5% compounded annual growth rate over the last five years, lower than its 13.1% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

2. High Debt Levels Increase Risk

Hercules Capital reported $59.45 million of cash and $2.31 billion of debt on its balance sheet in the most recent quarter.

As investors in high-quality companies, we primarily focus on whether a company’s profits can support its debt.

With $356.8 million of EBITDA over the last 12 months, we view Hercules Capital’s 6.3× net-debt-to-EBITDA ratio as inadequate. The company’s lacking profits relative to its borrowings give it little breathing room, raising red flags.

Final Judgment

Hercules Capital doesn’t pass our quality test. After the recent drawdown, the stock trades at 8× forward P/E (or $15.54 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at one of our all-time favorite software stocks.

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