Over the past six months, iHeartMedia’s stock price fell to $1.67. Shareholders have lost 15.2% of their capital, disappointing when considering the S&P 500 was flat. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in iHeartMedia, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think iHeartMedia Will Underperform?
Even with the cheaper entry price, we're cautious about iHeartMedia. Here are three reasons why we avoid IHRT and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, iHeartMedia’s sales grew at a weak 1% compounded annual growth rate over the last five years. This was below our standards. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, iHeartMedia’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
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.
iHeartMedia burned through $25.98 million of cash over the last year, and its $5.83 billion of debt exceeds the $167.7 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the iHeartMedia’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 iHeartMedia until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
iHeartMedia doesn’t pass our quality test. After the recent drawdown, the stock trades at 0.4× forward EV-to-EBITDA (or $1.67 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward one of our top software and edge computing picks.
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