Over the past six months, DaVita’s shares (currently trading at $146.05) have posted a disappointing 14% loss, well below the S&P 500’s 3.1% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in DaVita, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is DaVita Not Exciting?
Even with the cheaper entry price, we don't have much confidence in DaVita. Here are three reasons why you should be careful with DVA and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, DaVita’s sales grew at a tepid 2.5% compounded annual growth rate over the last five years. This was below our standards. 
2. Sales Volumes Stall, Demand Waning
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 Outpatient & Specialty Care company because there’s a ceiling to what customers will pay.
Over the last two years, DaVita failed to grow its treatments, which came in at 7.04 million in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests DaVita might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
3. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect DaVita’s revenue to rise by 4.6%, close to its 2.5% annualized growth for the past five years. This projection doesn't excite us and implies its newer products and services will not catalyze better top-line performance yet.
Final Judgment
DaVita’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 12.6× forward P/E (or $146.05 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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