What a fantastic six months it’s been for Seadrill. Shares of the company have skyrocketed 52.3%, hitting $45.97. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Seadrill, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Seadrill Will Underperform?
Despite the momentum, we're cautious about Seadrill. Here are three reasons why SDRL doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance can give signals about its business quality. Even a bad business, especially in a cyclical industry, can shine for a year or so, but a top-tier one should exhibit resilience through cycles. Unfortunately, Seadrill’s 4.1% annualized revenue growth over the last five years was sluggish. This was below our standard for the energy upstream and integrated energy sector.
2. Low Gross Margin Reveals Weak Structural Profitability
In any given year, energy gross margins are heavily influenced by prices, hedging, and cost inflation, but over a full cycle these gross margins reveal which producers are structurally advantaged through superior “rock” quality, infrastructure access, and cost position.
Seadrill, which averaged 34% gross margin over the last five years, exhibits poor unit economics in the sector. It means the company will struggle more at lower commodity prices than peers with better gross margins. 
3. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Seadrill’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 5.4%, meaning it lit $5.42 of cash on fire for every $100 in revenue.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Seadrill, we’ll be cheering from the sidelines. Following the recent surge, the stock trades at 101.5× forward P/E (or $45.97 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward the Amazon and PayPal of Latin America.
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