What a fantastic six months it’s been for Iridium. Shares of the company have skyrocketed 67.1%, hitting $31.15. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Iridium, 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 Is Iridium Not Exciting?
Despite the momentum, we're cautious about Iridium. Here are three reasons there are better opportunities than IRDM and a stock we'd rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within business services, a stretched historical view may miss new innovations or demand cycles. Iridium’s recent performance shows its demand has slowed as its annualized revenue growth of 5% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Iridium’s revenue to rise by 1.7%, a deceleration versus its 8.4% annualized growth for the past five years. This projection is underwhelming and suggests its products and services will see some demand headwinds.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Iridium’s margin dropped by 7.3 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Iridium’s free cash flow margin for the trailing 12 months was 34.4%.
Final Judgment
Iridium isn’t a terrible business, but it isn’t one of our picks. After the recent rally, the stock trades at 23.4× forward P/E (or $31.15 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 superior stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.
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