What a time it’s been for iHeartMedia. In the past six months alone, the company’s stock price has increased by a massive 79.6%, setting a new 52-week high of $5.43 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in iHeartMedia, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think iHeartMedia Will Underperform?
We’re happy investors have made money, but we don't have much confidence in iHeartMedia. Here are three reasons we avoid IHRT and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, iHeartMedia’s 5.6% annualized revenue growth over the last five years was weak. This was below our standard for the consumer discretionary sector.
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. On average, iHeartMedia’s ROIC decreased by 5 percentage points annually each year over the last few years. 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.
iHeartMedia burned through $13.15 billion of cash over the last year, and its $5.79 billion of debt exceeds the $270.9 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the iHeartMedia’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 iHeartMedia until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies helping consumers, but in the case of iHeartMedia, we’re out. After the recent surge, the stock trades at 7.9× forward EV-to-EBITDA (or $5.43 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. We’d recommend looking at one of our top software and edge computing picks.
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