Redwire’s stock price has taken a beating over the past six months, shedding 47.2% of its value and falling to $8.67 per share. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in Redwire, 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 Redwire Will Underperform?

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why you should be careful with RDW and a stock we'd rather own.

1. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Redwire’s earnings losses deepened over the last four years as its EPS dropped 37% 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, Redwire’s low margin of safety could leave its stock price susceptible to large downswings.

2. Free Cash Flow Margin Dropping

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.

As you can see below, Redwire’s margin dropped by 27.3 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s in the middle of a big investment cycle. Redwire’s free cash flow margin for the trailing 12 months was negative 58.2%.

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.

Redwire burned through $152 million of cash over the last year, and its $232.2 million of debt exceeds the $78.56 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Redwire’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 Redwire until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Redwire, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 9.9× forward EV-to-EBITDA (or $8.67 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.

Stocks We Would Buy Instead of Redwire

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