3 Reasons TPIC is Risky and 1 Stock to Buy Instead

Shareholders of TPI Composites would probably like to forget the past six months even happened. The stock dropped 52.1% and now trades at $0.78. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in TPI Composites, 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 Do We Think TPI Composites Will Underperform?

Even with the cheaper entry price, we're swiping left on TPI Composites for now. Here are three reasons why you should be careful with TPIC and a stock we'd rather own.

1. Declining Billings Reflect Product and Sales Weakness

Billings is a non-GAAP metric that sheds light on TPI Composites’s demand characteristics. This metric is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period - different from reported revenue, which must be recognized in pieces over the length of a contract.

TPI Composites’s billings came in at $336.2 million in the latest quarter, and it averaged 11.5% year-on-year declines over the last two years. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers due to increasing competition. It also suggests it may need to improve to its products, pricing, or go-to-market strategy.

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, TPI Composites’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

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

TPI Composites posted negative $25.95 million of EBITDA over the last 12 months, and its $736.2 million of debt exceeds the $181.6 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 TPI Composites 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 TPI Composites can improve its profitability and remain cautious until then.

Final Judgment

TPI Composites doesn’t pass our quality test. Following the recent decline, the stock trades at 0.7× forward EV-to-EBITDA (or $0.78 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. Let us point you toward a top digital advertising platform riding the creator economy.

Stocks We Would Buy Instead of TPI Composites

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