Vuzix Corporation (VUZI - Get Rating), which is known for its wearable augmented reality devices, has been a stellar momentum stock that has generated 1383.7% price gains over the past year. As the popularity of virtual reality has increased, VUZI has had success leveraging bullish market trends. The stock has gained 159.8% year-to-date.

The company announced yesterday that its smart glasses M400 and M4000 will support Microsoft Corporation’s (MSFT - Get Rating) Teams software. The announcement drove VUZI 25.4% higher in yesterday’s trading session.

However, despite having innovative products in its portfolio, VUZI’s financials are far from impressive. The company has failed to generate net profits over the past three years despite its having been in business for more than 20 years. The company’s operating and free cash flows have remained negative since 2017.

Thus, we think VUZI’s extraordinary stock price gains in the absence of  more robust  financials makes VUZI a highly risky investment.

Here’s what could shape VUZI’s performance in the near term:

Stretched Valuation

VUZI’s forward p/e and PEG ratios are -65.53 and -1.03, respectively. In terms of forward price/sales, VUZI is currently trading at 70.88x, substantially higher than the industry average 1.30x. Its forward ev/EBITDA of 233.98x is 1701.8% higher than the industry average 12.99x.

Financial Weakness

VUZI has been bleeding money over the past couple of years. While the company’s revenues have increased over the past three years, its net income has remained in  negative territory. Its  cost of revenue and operating expenses have increased significantly over this period.

Also, VUZI’s EPS has declined 13.4% year-over-year. Its trailing 12-month gross profits and net income are negative $3.14 million and $23.95 million, respectively. Its cash from its operations has been negative $15.56 million over the past year, and it has a trailing 12-month debt/free cash flow ratio of -0.07.

Consensus Price Target Indicates Potential Downside

VUZI is currently trading 3.5% below its all-time high of $24.44, which it hit on February 22.  Analysts expect the stock to decline 22.6% in the near term to hit $18.25 soon.

POWR Ratings Reflect Poor Prospects

VUZI has an overall rating of D, which equates Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

VUZI has an A  grade of A for Momentum due to its blistering price gains over the past year. However, the stock has an F grade for Value, Stability, and Quality. This is justified, given the company’s poor financials and premium valuation. Its trailing 12-month gross profit margin, EBITDA and net income margins, and ROE are all negative.

VUZI is ranked #39 of 43 stocks in the A-rated Technology – Electronics industry. In addition to the grades I’ve highlighted, you can check out additional POWR Ratings for Growth and Sentiment here.

There are 22 stocks in the Technology – Electronics industry with an overall rating of A or B. Click here to view them.

Bottom Line

VUZI has been surging based on investor optimism regarding the broader industry, absent fundamental or financial backing. The company’s inadequate cash flows have exacerbated its liquidity and solvency risks, leaving the its timely repayment of short- and long-term debt in question. Also, the stock has a beta of 2.26, indicating high volatility. While the current  market rally has allowed the stock to gain momentum, an impending broader market correction can lead the stock decline.

Want More Great Investing Ideas?

9 “MUST OWN” Growth Stocks for 2021

How to Ride the 2021 Stock Market Bubble

7 Best ETFs for the NEXT Bull Market

5 WINNING Stocks Chart Patterns

VUZI shares were trading at $24.75 per share on Tuesday morning, up $1.16 (+4.92%). Year-to-date, VUZI has gained 172.58%, versus a 4.18% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

More Resources for the Stocks in this Article