Over the past six months, Marcus & Millichap’s stock price fell to $25.58. Shareholders have lost 19.1% of their capital, which is disappointing considering the S&P 500 has climbed by 1.1%. This may have investors wondering how to approach the situation.
Is now the time to buy Marcus & Millichap, 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 Marcus & Millichap Will Underperform?
Even though the stock has become cheaper, we're cautious about Marcus & Millichap. Here are three reasons you should be careful with MMI and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Marcus & Millichap’s sales grew at a weak 1% compounded annual growth rate over the last five years. This was below our standards.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
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.
Marcus & Millichap has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 5%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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. Over the last few years, Marcus & Millichap’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping consumers, but in the case of Marcus & Millichap, we’re out. Following the recent decline, the stock trades at 38.2× forward P/E (or $25.58 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at the most dominant software business in the world.
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