What a fantastic six months it’s been for ProFrac. Shares of the company have skyrocketed 70.7%, hitting $7.29. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy ProFrac, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is ProFrac Not Exciting?
Despite the momentum, we’re sitting this one out for now. Here are three reasons why there are better opportunities than ACDC, plus one stock we’d rather own.
1. Low Gross Margin Reveals Weak Structural Profitability
In any given year, energy gross margins are heavily influenced by prices, hedging, and cost inflation, but over a full cycle these gross margins reveal which producers are structurally advantaged through superior “rock” quality, infrastructure access, and cost position.
ProFrac, which averaged 32.5% gross margin over the last five years, exhibited bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins.
2. Shrinking EBITDA Margin
Adjusted EBITDA margin captures the true operating profitability of an energy producer by removing accounting noise around depletion and capitalized drilling costs. It reveals how much cash the asset base generates before capital structure and reinvestment requirements shape reported earnings.
Analyzing the trend in its profitability, ProFrac’s EBITDA margin decreased by 8.1 percentage points over the last year. ProFrac’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its EBITDA margin for the trailing 12 months was 13.1%.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
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.
ProFrac has shown weak cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 3.9%, below what we’d expect for an upstream and integrated energy business.
Final Judgment
ProFrac isn’t a terrible business, but it doesn’t pass our bar. Following the recent surge, the stock trades at $7.29 per share (or a forward price-to-sales ratio of 0.6×). The market typically values companies like ProFrac based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.
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