3 Reasons MMI is Risky and 1 Stock to Buy Instead

Over the past six months, Marcus & Millichap’s stock price fell to $30.90. Shareholders have lost 18.2% of their capital, which is disappointing considering the S&P 500 has climbed by 4.1%. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Marcus & Millichap, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Marcus & Millichap Will Underperform?

Even though the stock has become cheaper, we're cautious about Marcus & Millichap. Here are three reasons why you should be careful with MMI and a stock we'd rather own.

1. Revenue Spiraling Downwards

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Marcus & Millichap struggled to consistently generate demand over the last five years as its sales dropped at a 3.2% annual rate. This wasn’t a great result and is a sign of poor business quality.

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.

Over the last two years, Marcus & Millichap’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.4%, meaning it lit $1.37 of cash on fire for every $100 in revenue.

3. 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).

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, Marcus & Millichap’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.

Final Judgment

Marcus & Millichap doesn’t pass our quality test. Following the recent decline, the stock trades at 308.9× forward P/E (or $30.90 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at the Amazon and PayPal of Latin America.

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