Knowles’s 12.6% return over the past six months has outpaced the S&P 500 by 7.1%, and its stock price has climbed to $20.65 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Knowles, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Knowles Will Underperform?
We’re happy investors have made money, but we don't have much confidence in Knowles. Here are three reasons why you should be careful with KN and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Knowles’s demand was weak and its revenue declined by 5.3% per year. This wasn’t a great result and is a sign of poor business quality. 
2. Fewer Distribution Channels Limit its Ceiling
With $563.1 million in revenue over the past 12 months, Knowles is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Knowles historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.8%, somewhat low compared to the best business services companies that consistently pump out 25%+.
Final Judgment
Knowles falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 17× forward P/E (or $20.65 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a top digital advertising platform riding the creator economy.
Stocks We Like More Than Knowles
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