Soho House has had an impressive run over the past six months as its shares have beaten the S&P 500 by 10%. The stock now trades at $8.85, marking a 25.5% gain. This performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Soho House, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Soho House Not Exciting?

We’re glad investors have benefited from the price increase, but we don't have much confidence in Soho House. Here are three reasons there are better opportunities than SHCO and a stock we'd rather own.

1. Weak Growth in Members Points to Soft Demand

Revenue growth can be broken down into changes in price and volume (for companies like Soho House, our preferred volume metric is members). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Soho House’s members came in at 267,494 in the latest quarter, and over the last two years, averaged 4.8% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

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.

While Soho House posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, Soho House’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 2%, meaning it lit $2.01 of cash on fire for every $100 in revenue.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Soho House’s $853.4 million of debt exceeds the $146.6 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $137.6 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Soho House could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Soho House can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Soho House isn’t a terrible business, but it doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 9.7× forward EV-to-EBITDA (or $8.85 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 our favorite semiconductor picks and shovels play.

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