What a fantastic six months it’s been for Ameresco. Shares of the company have skyrocketed 142%, hitting $33.98. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Ameresco, 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 for active Edge members.

Why Is Ameresco Not Exciting?

Despite the momentum, we don't have much confidence in Ameresco. Here are three reasons why AMRC doesn't excite us and a stock we'd rather own.

1. Low Gross Margin Reveals Weak Structural Profitability

At StockStory, we prefer high gross margin businesses because they indicate the company has pricing power or differentiated products, giving it a chance to generate higher operating profits.

Ameresco has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 16.5% gross margin over the last five years. Said differently, Ameresco had to pay a chunky $83.55 to its suppliers for every $100 in revenue.

2. 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.

Ameresco’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 29.5%, meaning it lit $29.51 of cash on fire for every $100 in revenue.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Ameresco burned through $379.1 million of cash over the last year, and its $1.95 billion of debt exceeds the $94.55 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Ameresco’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Ameresco until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

Ameresco isn’t a terrible business, but it isn’t one of our picks. After the recent surge, the stock trades at 36.3× forward P/E (or $33.98 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.

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