PacBio currently trades at $1.28 per share and has shown little upside over the past six months, posting a middling return of 2.4%. The stock also fell short of the S&P 500’s 16.8% gain during that period.
Is there a buying opportunity in PacBio, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think PacBio Will Underperform?
We're swiping left on PacBio for now. Here are three reasons there are better opportunities than PACB and a stock we'd rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within healthcare, a stretched historical view may miss recent innovations or disruptive industry trends. PacBio’s recent performance shows its demand has slowed as its annualized revenue growth of 3.4% over the last two years was below its five-year trend. 
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, PacBio’s margin dropped by 28.2 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because it’s already burning cash. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. PacBio’s free cash flow margin for the trailing 12 months was negative 97.6%.
3. 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.
PacBio burned through $152.3 million of cash over the last year, and its $699.2 million of debt exceeds the $314.7 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the PacBio’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 PacBio until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
PacBio falls short of our quality standards. With its shares underperforming the market lately, the stock trades at $1.28 per share (or a forward price-to-sales ratio of 2.3×). The market typically values companies like PacBio based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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