WideOpenWest trades at $5.13 and has moved in lockstep with the market. Its shares have returned 24.5% over the last six months while the S&P 500 has gained 29.3%.

Is now the time to buy WideOpenWest, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Do We Think WideOpenWest Will Underperform?

We're sitting this one out for now. Here are three reasons we avoid WOW and a stock we'd rather own.

1. Decline in Subscribers Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like WideOpenWest, our preferred volume metric is subscribers). While both are important, the latter is the most critical to analyze because prices have a ceiling.

WideOpenWest’s subscribers came in at 469,600 in the latest quarter, and over the last two years, averaged 5% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests WideOpenWest might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

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, WideOpenWest’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 10.8%, meaning it lit $10.84 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, WideOpenWest’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

WideOpenWest doesn’t pass our quality test. That said, the stock currently trades at 1.6× forward EV-to-EBITDA (or $5.13 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 one of our top software and edge computing picks.

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