Optimum Communications’s stock price has taken a beating over the past six months, shedding 34% of its value and falling to $1.60 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Optimum Communications, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Optimum Communications Will Underperform?

Even though the stock has become cheaper, we don't have much confidence in Optimum Communications. Here are three reasons you should be careful with OPTU and a stock we'd rather own.

1. Decline in Broadband Subscribers Points to Weak Demand

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

Optimum Communications’s broadband subscribers came in at 3.87 million in the latest quarter, and over the last two years, averaged 3.6% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Optimum Communications might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

2. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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. Unfortunately, Optimum Communications’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

3. High Debt Levels Increase Risk

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.

Optimum Communications’s $26.24 billion of debt exceeds the $938.8 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $3.27 billion 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. Optimum Communications 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 Optimum Communications can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Optimum Communications, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 7.7× forward EV-to-EBITDA (or $1.60 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. Let us point you toward a top digital advertising platform riding the creator economy.

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