Over the past six months, Keysight’s stock price fell to $165.95. Shareholders have lost 6% of their capital, which is disappointing considering the S&P 500 has climbed by 5.3%. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Keysight, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Keysight Will Underperform?

Even with the cheaper entry price, we're swiping left on Keysight for now. Here are three reasons why there are better opportunities than KEYS and a stock we'd rather own.

1. Backlog Declines as Orders Drop

Investors interested in Inspection Instruments companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Keysight’s future revenue streams.

Keysight’s backlog came in at $2.35 billion in the latest quarter, and it averaged 3.3% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.

2. EPS Barely Growing

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Keysight’s EPS grew at an unimpressive 7.8% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 4% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

3. 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. Over the last few years, Keysight’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Keysight, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 22.7× forward P/E (or $165.95 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at our favorite semiconductor picks and shovels play.

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