Although the S&P 500 is down 1.7% over the past six months, Iridium’s stock price has fallen further to $25.30, losing shareholders 14.8% of their capital. 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 Iridium, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Iridium Not Exciting?
Even though the stock has become cheaper, we're swiping left on Iridium for now. Here are three reasons why we avoid IRDM and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
With $841.7 million in revenue over the past 12 months, Iridium is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.
2. Free Cash Flow Margin Dropping
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.
As you can see below, Iridium’s margin dropped by 3.2 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Iridium’s free cash flow margin for the trailing 12 months was 33.9%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Iridium historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.4%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.
Final Judgment
Iridium’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 17.1× forward P/E (or $25.30 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward one of our top digital advertising picks.
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