Magnachip has been treading water for the past six months, recording a small loss of 2.5% while holding steady at $3.13. The stock also fell short of the S&P 500’s 22.9% gain during that period.
Is there a buying opportunity in Magnachip, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.
Why Do We Think Magnachip Will Underperform?
We're swiping left on Magnachip for now. Here are three reasons we avoid MX and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Magnachip’s demand was weak and its revenue declined by 16.3% per year. This was below our standards and is a sign of poor business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Magnachip’s demanding reinvestments have drained its resources over the last two years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 16.1%, meaning it lit $16.06 of cash on fire for every $100 in revenue.
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.
Magnachip burned through $52.97 million of cash over the last year. With $113.3 million of cash on its balance sheet, the company has around 26 months of runway left (assuming its $39.46 million of debt isn’t due right away).
Unless the Magnachip’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 Magnachip until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies furthering technological innovation, but in the case of Magnachip, we’re out. With its shares trailing the market in recent months, the stock trades at $3.13 per share (or a forward price-to-sales ratio of 0.6×). The market typically values companies like Magnachip 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. We’d recommend looking at our favorite semiconductor picks and shovels play.
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