The stock of Xunlei (NAS:XNET, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $6.73 per share and the market cap of $450.1 million, Xunlei stock is believed to be significantly overvalued. GF Value for Xunlei is shown in the chart below.
Because Xunlei is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 8.4% over the past five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Xunlei has a cash-to-debt ratio of 11.64, which is better than 77% of the companies in the industry of Media - Diversified. GuruFocus ranks the overall financial strength of Xunlei at 6 out of 10, which indicates that the financial strength of Xunlei is fair. This is the debt and cash of Xunlei over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Xunlei has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $186.4 million and loss of $0.203 a share. Its operating margin is -7.35%, which ranks worse than 70% of the companies in the industry of Media - Diversified. Overall, the profitability of Xunlei is ranked 3 out of 10, which indicates poor profitability. This is the revenue and net income of Xunlei over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Xunlei is 8.4%, which ranks better than 74% of the companies in the industry of Media - Diversified. The 3-year average EBITDA growth rate is -13%, which ranks worse than 70% of the companies in the industry of Media - Diversified.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Xunlei's ROIC is -10.55 while its WACC came in at 10.45. The historical ROIC vs WACC comparison of Xunlei is shown below:
In conclusion, The stock of Xunlei (NAS:XNET, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks worse than 70% of the companies in the industry of Media - Diversified. To learn more about Xunlei stock, you can check out its 30-year Financials here.
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