What a brutal six months it’s been for Magnachip. The stock has dropped 33.4% and now trades at $3.13, rattling many shareholders. This might have investors contemplating their next move.

Is now the time to buy Magnachip, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why MX doesn't excite us and a stock we'd rather own.

Why Do We Think Magnachip Will Underperform?

With its technology found in common consumer electronics such as TVs and smartphones, Magnachip Semiconductor (NYSE: MX) is a provider of analog and mixed-signal semiconductors.

1. Revenue Spiraling Downwards

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Magnachip’s demand was weak and its revenue declined by 18.3% per year. This wasn’t a great result and is a sign of poor business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Magnachip’s earnings losses deepened over the last five years as its EPS dropped 45.5% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Magnachip’s low margin of safety could leave its stock price susceptible to large downswings.

3. Cash Burn Ignites Concerns

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.

While Magnachip posted positive free cash flow this quarter, the broader story hasn’t been so clean. Magnachip’s demanding reinvestments have drained its resources over the last two years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 6%, meaning it lit $6.00 of cash on fire for every $100 in revenue.

Final Judgment

We cheer for all companies solving complex technology issues, but in the case of Magnachip, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at $3.13 per share (or 0.6× forward price-to-sales). The market typically values companies like Magnachip based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d recommend looking at one of our top digital advertising picks.

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