PacBio’s 31.3% return over the past six months has outpaced the S&P 500 by 23.8%, and its stock price has climbed to $1.67 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in PacBio, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is PacBio Not Exciting?
We’re happy investors have made money, but we're swiping left on PacBio for now. Here are three reasons we avoid PACB and a stock we'd rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but within healthcare, a stretched historical view may miss new innovations or demand cycles. PacBio’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 10.7% over the last two years. 
2. 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.
PacBio’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 126%, meaning it lit $126.35 of cash on fire for every $100 in revenue.
3. Restricted Access to Capital Increases Risk
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.
PacBio posted negative $139.9 million of EBITDA over the last 12 months, and its $703.2 million of debt exceeds the $279.5 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
We implore our readers to tread carefully because credit agencies could downgrade PacBio if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope PacBio can improve its profitability and remain cautious until then.
Final Judgment
PacBio isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at $1.67 per share (or a forward price-to-sales ratio of 2.8×). The market typically values companies like PacBio based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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