Methode Electronics has gotten torched over the last six months - since January 2025, its stock price has dropped 48.9% to $6.65 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Methode Electronics, 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 Do We Think Methode Electronics Will Underperform?
Even with the cheaper entry price, we're cautious about Methode Electronics. Here are three reasons why MEI doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Methode Electronics struggled to consistently increase demand as its $1.05 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and signals it’s a low quality business. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Methode Electronics’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
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.
Methode Electronics burned through $15.2 million of cash over the last year, and its $348.9 million of debt exceeds the $103.6 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Methode Electronics’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 Methode Electronics until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Methode Electronics falls short of our quality standards. After the recent drawdown, the stock trades at 9.9× forward P/E (or $6.65 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. Let us point you toward one of our top software and edge computing picks.
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