Gilead Sciences has been treading water for the past six months, holding steady at $112.78. The stock also fell short of the S&P 500’s 16.5% gain during that period.
Is there a buying opportunity in Gilead Sciences, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Gilead Sciences Not Exciting?
We don't have much confidence in Gilead Sciences. Here are three reasons there are better opportunities than GILD and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Gilead Sciences grew its sales at a mediocre 5.4% compounded annual growth rate. This fell short of our benchmark for the healthcare sector.
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 Gilead Sciences’s revenue to rise by 2.3%, close to its 5.4% annualized growth for the past five years. This projection doesn't excite us and suggests its newer products and services will not lead to better top-line performance yet.
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, Gilead Sciences’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Gilead Sciences isn’t a terrible business, but it doesn’t pass our quality test. With its shares lagging the market recently, the stock trades at 13.6× forward P/E (or $112.78 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
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