Over the past six months, Mister Car Wash’s stock price fell to $6.27. Shareholders have lost 11.3% of their capital, which is disappointing considering the S&P 500 has climbed by 1.1%. This might have investors contemplating their next move.

Is now the time to buy Mister Car Wash, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Mister Car Wash Will Underperform?

Even with the cheaper entry price, we don't have much confidence in Mister Car Wash. Here are three reasons why MCW doesn't excite us and a stock we'd rather own.

1. Same-Store Sales Falling Behind Peers

Investors interested in Specialized Consumer Services companies should track same-store sales in addition to reported revenue. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Mister Car Wash’s underlying demand characteristics.

Over the last two years, Mister Car Wash’s same-store sales averaged 2.6% year-on-year growth. This performance was underwhelming and suggests it might have to change its strategy or pricing, which can disrupt operations.

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, Mister Car Wash’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. 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.

Mister Car Wash burned through $25.14 million of cash over the last year, and its $1.80 billion of debt exceeds the $39.13 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

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

Final Judgment

Mister Car Wash doesn’t pass our quality test. After the recent drawdown, the stock trades at 13.5× forward P/E (or $6.27 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d suggest looking at the most dominant software business in the world.

Stocks We Like More Than Mister Car Wash

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