Over the last six months, Ocular Therapeutix’s shares have sunk to $10.44, producing a disappointing 7.4% loss - a stark contrast to the S&P 500’s 11.3% gain. This might have investors contemplating their next move.
Is now the time to buy Ocular Therapeutix, 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 Ocular Therapeutix Will Underperform?
Despite the more favorable entry price, we don't have much confidence in Ocular Therapeutix. Here are three reasons there are better opportunities than OCUL and a stock we'd rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but within healthcare, a stretched historical view may miss new innovations or demand cycles. Ocular Therapeutix’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 1.7% over the last two years. 
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, Ocular Therapeutix’s margin dropped meaningfully 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. Ocular Therapeutix’s free cash flow margin for the trailing 12 months was negative 358%.
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.
Ocular Therapeutix burned through $199.4 million of cash over the last year. With $344.8 million of cash on its balance sheet, the company has around 21 months of runway left (assuming its $77.01 million of debt isn’t due right away).
Unless the Ocular Therapeutix’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 Ocular Therapeutix until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Ocular Therapeutix falls short of our quality standards. After the recent drawdown, the stock trades at $10.44 per share (or a forward price-to-sales ratio of 33.2×). The market typically values companies like Ocular Therapeutix based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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