SLB has been on fire lately. In the past six months alone, the company’s stock price has rocketed 59.2%, reaching $52.41 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy SLB, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is SLB Not Exciting?
We’re happy investors have made money, but we don't have much confidence in SLB. Here are two reasons you should be careful with SLB and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Cyclical sectors like Energy often flatter weaker operators during favorable price environments, but a longer-term lens separates those from businesses that can consistently perform across market cycles. Regrettably, SLB’s sales grew at a mediocre 9.6% compounded annual growth rate over the last five years. This fell short of our benchmark for the energy upstream and integrated energy sector.
2. Low Gross Margin Reveals Weak Structural Profitability
In a single quarter or year, gross margins in the sector can swing wildly due to commodity prices, hedging, or changes in labor costs. Over a multi-year period across different points in the cycle, gross margin differences can signal whether a company is a structurally-advantaged producer (“rock” quality, takeaway, operating costs) or not.
SLB, which averaged 21.5% gross margin over the last five years, exhibiting bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins. 
Final Judgment
SLB’s business quality ultimately falls short of our standards. After the recent rally, the stock trades at 19.3× forward P/E (or $52.41 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of our top digital advertising picks.
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