Over the past six months, Keysight has been a great trade, beating the S&P 500 by 14.1%. Its stock price has climbed to $172.31, representing a healthy 26.7% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Keysight, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Despite the momentum, we're sitting this one out for now. Here are three reasons why there are better opportunities than KEYS and a stock we'd rather own.
Why Do We Think Keysight Will Underperform?
Spun off from Hewlett-Packard in 2014, Keysight (NYSE:KEYS) offers electronic measurement products for use in various sectors.
1. Backlog Declines as Orders Drop
Investors interested in Inspection Instruments companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Keysight’s future revenue streams.
Keysight’s backlog came in at $2.36 billion in the latest quarter, and it averaged 3.5% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation. 
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Keysight’s EPS grew at an unimpressive 5.8% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 2.9% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
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, Keysight’s margin dropped by 3.3 percentage points over the last five years. If its declines continue, it could signal higher capital intensity. Keysight’s free cash flow margin for the trailing 12 months was 18%.
Final Judgment
Keysight doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 24.7× forward price-to-earnings (or $172.31 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of our all-time favorite software stocks with a durable competitive moat.
Stocks We Like More Than Keysight
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