Adtalem currently trades at $140 and has been a dream stock for shareholders. It’s returned 429% since October 2020, blowing past the S&P 500’s 86.5% gain. The company has also beaten the index over the past six months as its stock price is up 33.8% thanks to its solid quarterly results.

Is now the time to buy Adtalem, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Is Adtalem Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about Adtalem. Here are three reasons there are better opportunities than ATGE 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. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Adtalem grew its sales at a 11.2% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

2. Projected Revenue Growth Is Slim

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 Adtalem’s revenue to rise by 7.5%, a deceleration versus its 11.2% annualized growth for the past five years. This projection is underwhelming and suggests its products and services will face some demand challenges.

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).

Adtalem historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10.1%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

Final Judgment

Adtalem isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 18.3× forward P/E (or $140 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d recommend looking at the Amazon and PayPal of Latin America.

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