The past six months have been a windfall for Tandem Diabetes’s shareholders. The company’s stock price has jumped 93.6%, hitting $24.34 per share. 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 Tandem Diabetes, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Tandem Diabetes Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on Tandem Diabetes for now. Here are three reasons there are better opportunities than TNDM and a stock we'd rather own.
1. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Tandem Diabetes’s earnings losses deepened over the last five years as its EPS dropped 18.5% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Tandem Diabetes’s low margin of safety could leave its stock price susceptible to large downswings.
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Tandem Diabetes’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
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.
Tandem Diabetes posted negative $46.09 million of EBITDA over the last 12 months, and its $444.5 million of debt exceeds the $292.7 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 Tandem Diabetes 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 Tandem Diabetes can improve its profitability and remain cautious until then.
Final Judgment
Tandem Diabetes doesn’t pass our quality test. Following the recent rally, the stock trades at 30.1× forward EV-to-EBITDA (or $24.34 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward one of our top software and edge computing picks.
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