Shareholders of New Fortress Energy would probably like to forget the past six months even happened. The stock dropped 75.6% and now trades at $0.59. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy New Fortress Energy, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is New Fortress Energy Not Exciting?
Even though the stock has become cheaper, we're swiping left on New Fortress Energy for now. Here are two reasons we avoid NFE and a stock we'd rather own.
1. 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.
New Fortress Energy’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 71.3%, meaning it lit $71.26 of cash on fire for every $100 in revenue.
2. 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.
New Fortress Energy burned through $1.89 billion of cash over the last year, and its $9.33 billion of debt exceeds the $551.1 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the New Fortress Energy’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 New Fortress Energy until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
New Fortress Energy isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 79.8× forward EV-to-EBITDA (or $0.59 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
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