QuidelOrtho’s stock price has taken a beating over the past six months, shedding 38.5% of its value and falling to $25.50 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in QuidelOrtho, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think QuidelOrtho Will Underperform?
Despite the more favorable entry price, we're cautious about QuidelOrtho. Here are three reasons why we avoid QDEL and a stock we'd rather own.
1. Declining Constant Currency Revenue, Demand Takes a Hit
We can better understand Medical Devices & Supplies - Imaging, Diagnostics companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of QuidelOrtho’s control and are not indicative of underlying demand.
Over the last two years, QuidelOrtho’s constant currency revenue averaged 6.2% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests QuidelOrtho might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Free Cash Flow Margin Dropping
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.
As you can see below, QuidelOrtho’s margin dropped by 21 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. QuidelOrtho’s free cash flow margin for the trailing 12 months was breakeven.
3. 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. Unfortunately, QuidelOrtho’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies helping people live better, but in the case of QuidelOrtho, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 9.2× forward P/E (or $25.50 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of QuidelOrtho
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