– By GF Value
The stock of Infinera (NAS:INFN, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $10.15 per share and the market cap of $2.1 billion, Infinera stock appears to be significantly overvalued. GF Value for Infinera is shown in the chart below.
Because Infinera is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 12.9% over the past five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Infinera has a cash-to-debt ratio of 0.47, which is worse than 77% of the companies in Hardware industry. GuruFocus ranks the overall financial strength of Infinera at 3 out of 10, which indicates that the financial strength of Infinera is poor. This is the debt and cash of Infinera over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Infinera has been profitable 2 years over the past 10 years. During the past 12 months, the company had revenues of $1.4 billion and loss of $1.12 a share. Its operating margin of -8.67% worse than 82% of the companies in Hardware industry. Overall, GuruFocus ranks Infinera’s profitability as poor. This is the revenue and net income of Infinera over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company’s revenue and earnings are declining, the value of the company will decrease. Infinera’s 3-year average revenue growth rate is better than 79% of the companies in Hardware industry. Infinera’s 3-year average EBITDA growth rate is 28.5%, which ranks better than 82% of the companies in Hardware industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Infinera’s return on invested capital is -11.32, and its cost of capital is 10.46. The historical ROIC vs WACC comparison of Infinera is shown below:
In closing, Infinera (NAS:INFN, 30-year Financials) stock appears to be significantly overvalued. The company’s financial condition is poor and its profitability is poor. Its growth ranks better than 82% of the companies in Hardware industry. To learn more about Infinera stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.