Over the past six months, EchoStar has been a great trade, beating the S&P 500 by 25.5%. Its stock price has climbed to $30.64, representing a healthy 30.8% increase. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy EchoStar, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think EchoStar Will Underperform?

We’re happy investors have made money, but we don't have much confidence in EchoStar. Here are three reasons why there are better opportunities than SATS and a stock we'd rather own.

1. Revenue Tumbling Downwards

We at StockStory place the most emphasis on long-term growth, but within business services, a stretched historical view may miss recent innovations or disruptive industry trends. EchoStar’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 6.3% over the last two years.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, EchoStar’s margin dropped by 6.8 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle. EchoStar’s free cash flow margin for the trailing 12 months was negative 1.8%.

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.

EchoStar burned through $275.5 million of cash over the last year, and its $29.53 billion of debt exceeds the $5.23 billion of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the EchoStar’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 EchoStar until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of EchoStar, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at 5.7× forward EV-to-EBITDA (or $30.64 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at one of our top software and edge computing picks.

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