Over the past six months, WideOpenWest’s stock price fell to $3.43. Shareholders have lost 19.7% of their capital, which is disappointing considering the S&P 500 has climbed by 5.4%. This might have investors contemplating their next move.

Is there a buying opportunity in WideOpenWest, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think WideOpenWest Will Underperform?

Even though the stock has become cheaper, we're cautious about WideOpenWest. Here are three reasons why there are better opportunities than WOW and a stock we'd rather own.

1. Decline in Subscribers Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like WideOpenWest, our preferred volume metric is subscribers). While both are important, the latter is the most critical to analyze because prices have a ceiling.

WideOpenWest’s subscribers came in at 473,800 in the latest quarter, and over the last two years, averaged 4.7% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests WideOpenWest might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

2. Cash Burn Ignites Concerns

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.

Over the last two years, WideOpenWest’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 13.9%, meaning it lit $13.93 of cash on fire for every $100 in revenue.

3. 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, WideOpenWest’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.

Final Judgment

We see the value of companies helping consumers, but in the case of WideOpenWest, we’re out. Following the recent decline, the stock trades at 1× forward EV-to-EBITDA (or $3.43 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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