Even during a down period for the markets, Rush Street Interactive has gone against the grain, climbing to $22.76. Its shares have yielded a 24.8% return over the last six months, beating the S&P 500 by 26.9%. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Rush Street Interactive, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Rush Street Interactive Will Underperform?

We’re glad investors have benefited from the price increase, but we're cautious about Rush Street Interactive. Here are three reasons why RSI doesn't excite us and a stock we'd rather own.

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. Over the last five years, Rush Street Interactive grew its sales at a 32.4% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

2. Weak Operating Margin Could Cause Trouble

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Rush Street Interactive’s operating margin has been trending up over the last 12 months and averaged 5.4% over the last two years. The company’s higher efficiency is a breath of fresh air, but its suboptimal cost structure means it still sports inadequate profitability for a consumer discretionary business.

3. Cash Flow Margin Set to Decline

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.

Over the next year, analysts predict Rush Street Interactive’s cash conversion will slightly fall. Their consensus estimates imply its free cash flow margin of 14.5% for the last 12 months will decrease to 14.7%.

Final Judgment

We see the value of companies helping consumers, but in the case of Rush Street Interactive, we’re out. With its shares topping the market in recent months, the stock trades at 39.7× forward P/E (or $22.76 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.

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