Over the last six months, Array shares have sunk to $5.70, producing a disappointing 10.5% loss - worse than the S&P 500’s 1.4% drop. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

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

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why we avoid ARRY and a stock we'd rather own.

Why Do We Think Array Will Underperform?

Going public in October 2020, Array (NASDAQ:ARRY) is a global manufacturer of ground-mounting tracking systems for utility and distributed generation solar energy projects.

1. Demand Slipping as Sales Volumes Decline

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Renewable Energy company because there’s a ceiling to what customers will pay.

Array’s units sold came in at 2,988 in the latest quarter, and they averaged 14.2% year-on-year declines over the last two years. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Array might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

2. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

While Array posted positive free cash flow this quarter, the broader story hasn’t been so clean. Array’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 5%, meaning it lit $5.01 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, Array’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

Array doesn’t pass our quality test. Following the recent decline, the stock trades at 7.3× forward price-to-earnings (or $5.70 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. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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