Even though Sensata Technologies (currently trading at $30.44 per share) has gained 9.3% over the last six months, it has lagged the S&P 500’s 14.9% return during that period. This might have investors contemplating their next move.
Is there a buying opportunity in Sensata Technologies, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Sensata Technologies Will Underperform?
We're sitting this one out for now. Here are three reasons we avoid ST and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Sensata Technologies’s sales grew at a mediocre 4.2% compounded annual growth rate over the last five years. This fell short of our benchmark for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Sensata Technologies’s revenue to stall. While this projection suggests its newer products and services will fuel better top-line performance, it is still below average for the sector.
3. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.
Sensata Technologies’s gross margin is one of the worst in the semiconductor industry, signaling it operates in a competitive market and lacks pricing power. As you can see below, it averaged a 30.6% gross margin over the last two years. That means Sensata Technologies paid its suppliers a lot of money ($69.37 for every $100 in revenue) to run its business. 
Final Judgment
Sensata Technologies falls short of our quality standards. With its shares underperforming the market lately, the stock trades at 8.9× forward P/E (or $30.44 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d suggest looking at one of our all-time favorite software stocks.
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