SmartRent’s stock price has taken a beating over the past six months, shedding 26.7% of its value and falling to $1.10 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy SmartRent, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why we avoid SMRT and a stock we'd rather own.

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. SmartRent’s recent performance marks a sharp pivot from its four-year trend as its revenue has shown annualized declines of 7.9% over the last two years. SmartRent isn’t alone in its struggles as the Internet of Things industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

SmartRent has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 14.3% gross margin over the last five years. That means SmartRent paid its suppliers a lot of money ($85.71 for every $100 in revenue) to run its business.

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.

SmartRent’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 27.7%, meaning it lit $27.69 of cash on fire for every $100 in revenue.

SmartRent isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at $1.10 per share (or a forward price-to-sales ratio of 1.3×). The market typically values companies like SmartRent 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. Let us point you toward one of our all-time favorite software stocks.

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