nLIGHT (LASR): Buy, Sell, or Hold Post Q1 Earnings?

What a time it’s been for nLIGHT. In the past six months alone, the company’s stock price has increased by a massive 93.7%, reaching $67.13 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy nLIGHT, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is nLIGHT Not Exciting?

We’re glad investors have benefited from the price increase, but we don’t have much confidence in nLIGHT. Here are three reasons why there are better opportunities than LASR, plus one stock we’d rather own.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, nLIGHT’s 3.8% annualized revenue growth over the last five years was sluggish. This was below our standard for the industrials sector.

2. Operating Losses Sound the Alarm

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Although nLIGHT broke even this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 18.3% over the last five years. Unprofitable industrials companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

3. 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.

While nLIGHT posted positive free cash flow this quarter, the broader story hasn’t been so clean. nLIGHT’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 4.1%, meaning it lit $4.11 of cash on fire for every $100 in revenue.

Final Judgment

nLIGHT isn’t a terrible business, but it isn’t one of our picks. Following the recent surge, the stock trades at 148.9× forward P/E (or $67.13 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.

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