What a time it’s been for DaVita. In the past six months alone, the company’s stock price has increased by a massive 122%, reaching $235.17 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in DaVita, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is DaVita Not Exciting?
Despite the momentum, we’re cautious about DaVita. Here are three reasons why DVA doesn’t excite us, plus one stock we’d rather own.
1. Sales Volumes Stall, Demand Waning
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Outpatient & Specialty Care company because there’s a ceiling to what customers will pay.
Over the last two years, DaVita failed to grow its treatments, which came in at 7.03 million in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests DaVita might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect DaVita’s revenue to rise by 2.6%, a deceleration versus its 3.7% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will face some demand challenges.
3. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, DaVita’s margin dropped by 1.9 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. DaVita’s free cash flow margin for the trailing 12 months was 10.8%.
Final Judgment
DaVita’s business quality ultimately falls short of our standards. After the recent rally, the stock trades at 15.4× forward P/E (or $235.17 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re pretty confident there are superior stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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