Over the past six months, Seadrill has been a great trade, beating the S&P 500 by 13%. Its stock price has climbed to $39.86, representing a healthy 21.6% increase. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Seadrill, 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.

Why Do We Think Seadrill Will Underperform?

We’re glad investors have benefited from the price increase, but we’re cautious about Seadrill. Here are three reasons why there are better opportunities than SDRL, plus one stock we’d rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance can give signals about its business quality. Even a bad business, especially in a cyclical industry, can shine for a year or so, but a top-tier one should exhibit resilience through cycles. Regrettably, Seadrill’s sales grew at a sluggish 6.1% compounded annual growth rate over the last five years. This fell short of our benchmark for the energy upstream and integrated energy sector.

2. Low Gross Margin Reveals Weak Structural Profitability

While energy gross margins can be distorted by commodity prices, hedging, and short-term cost swings, sustained margins across a full cycle reflect a producer’s underlying asset quality, infrastructure position, and cost structure.

Seadrill, which averaged 34.8% gross margin over the last five years, exhibits poor unit economics in the sector. It means the company will struggle more at lower commodity prices than peers with better gross margins.

3. Cash Burn Ignites Concerns

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Seadrill’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 5.2%, meaning it lit $5.19 of cash on fire for every $100 in revenue.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Seadrill, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at 23.1× forward P/E (or $39.86 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.

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