What a fantastic six months it’s been for Frontdoor. Shares of the company have skyrocketed 82.2%, hitting $68.32. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Frontdoor, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Frontdoor Not Exciting?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons why FTDR doesn't excite us 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 put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Frontdoor’s 6.8% annualized revenue growth over the last five years was sluggish. This was below our standard for the consumer discretionary sector.
2. Inability to Grow Home Service Plans Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Frontdoor, our preferred volume metric is home service plans). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Over the last two years, Frontdoor failed to grow its home service plans, which came in at 2.09 million in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Frontdoor might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
3. 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 Frontdoor’s revenue to rise by 8.5%, close to its 6.8% annualized growth for the past five years. This projection doesn't excite us and indicates its newer products and services will not accelerate its top-line performance yet.
Final Judgment
Frontdoor isn’t a terrible business, but it isn’t one of our picks. Following the recent rally, the stock trades at 18.9× forward P/E (or $68.32 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.
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