Shareholders of nLIGHT would probably like to forget the past six months even happened. The stock dropped 35.8% and now trades at $6.61. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

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Even with the cheaper entry price, we're cautious about nLIGHT. Here are three reasons why you should be careful with LASR and a stock we'd rather own.

Why Do We Think nLIGHT Will Underperform?

Founded by a former CEO and Harvard-educated entrepreneur Scott Keeneyn, nLIGHT (NASDAQ:LASR) offers semiconductor and fiber lasers to the industrial, aerospace & defense, and medical sectors.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, nLIGHT’s 2.4% annualized revenue growth over the last five years was sluggish. This was below our standards.

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.

nLIGHT’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 6.4%, meaning it lit $6.39 of cash on fire for every $100 in revenue.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative 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. Over the last few years, nLIGHT’s ROIC has unfortunately decreased significantly. 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 their customers, but in the case of nLIGHT, we’re out. Following the recent decline, the stock trades at $6.61 per share (or 1.7× forward price-to-sales). The market typically values companies like nLIGHT 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 a dominant Aerospace business that has perfected its M&A strategy .