3 Reasons to Avoid PACB and 1 Stock to Buy Instead

PacBio currently trades at $1.47 per share and has shown little upside over the past six months, posting a small loss of 4.5%. The stock also fell short of the S&P 500’s 5.4% gain during that period.

Is there a buying opportunity in PacBio, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think PacBio Will Underperform?

We're swiping left on PacBio for now. Here are three reasons why you should be careful with PACB and a stock we'd rather own.

1. Lackluster Revenue Growth

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 shows its demand has slowed as its annualized revenue growth of 6.6% over the last two years was below its five-year trend.

2. Free Cash Flow Margin Dropping

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.

As you can see below, PacBio’s margin dropped by 29.9 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because it’s already burning cash. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. PacBio’s free cash flow margin for the trailing 12 months was negative 117%.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

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 burned through $178.1 million of cash over the last year, and its $648.6 million of debt exceeds the $343.1 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the PacBio’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of PacBio until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

PacBio falls short of our quality standards. With its shares lagging the market recently, the stock trades at $1.47 per share (or a forward price-to-sales ratio of 2.7×). 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. We’d recommend looking at one of our top software and edge computing picks.

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