What a brutal six months it’s been for Hudson Technologies. The stock has dropped 23.1% and now trades at $5.63, rattling many shareholders. 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 Hudson Technologies, 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 Hudson Technologies Will Underperform?
Even with the cheaper entry price, we’re cautious about Hudson Technologies. Here are three reasons why there are better opportunities than HDSN, plus one stock we’d rather own.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Hudson Technologies’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 4.7% over the last two years. 
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Hudson Technologies’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Hudson Technologies burned through $34.84 million of cash over the last year. With $19.37 million of cash on its balance sheet, the company has around 7 months of runway left (assuming its $5.27 million of debt isn’t due right away).
Unless the Hudson Technologies’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Hudson Technologies until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies helping their customers, but in the case of Hudson Technologies, we’re out. Following the recent decline, the stock trades at $5.63 per share (or a trailing 12-month price-to-sales ratio of 0.9×). The market typically values companies like Hudson Technologies based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. We’d recommend looking at the most entrenched endpoint security platform on the market.
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