Over the past six months, Alight’s stock price fell to $5.79. Shareholders have lost 16.5% of their capital, which is disappointing considering the S&P 500 has climbed by 4.3%. This might have investors contemplating their next move.

Is now the time to buy Alight, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think Alight Will Underperform?

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why we avoid ALIT 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, Alight’s demand was weak and its revenue declined by 1.9% per year. This wasn’t a great result and is a sign of poor business quality.

2. EPS Took a Dip Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for Alight, its EPS and revenue declined by 3.5% and 11.9% annually over the last two years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Alight’s low margin of safety could leave its stock price susceptible to large downswings.

3. Previous Growth Initiatives Haven’t Paid Off Yet

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).

Alight historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 0.6%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Alight, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 9× forward P/E (or $5.79 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.

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