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Should Alpha and Omega Semiconductor (NASDAQ:AOSL) Be Disappointed With Their 39% Profit?

Simply Wall St

If you want to compound wealth in the stock market, you can do so by buying an index fund. But you can do a lot better than that by buying good quality businesses for attractive prices. For example, the Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) share price is up 39% in the last five years, slightly above the market return. In stark contrast, the stock price has actually fallen 13% in the last year.

View our latest analysis for Alpha and Omega Semiconductor

While Alpha and Omega Semiconductor made a small profit, in the last year, we think that the market is probably more focussed on the top line growth at the moment. As a general rule, we think this kind of company is more comparable to loss-making stocks, since the actual profit is so low. It would be hard to believe in a more profitable future without growing revenues.

In the last 5 years Alpha and Omega Semiconductor saw its revenue grow at 8.0% per year. That's a pretty good long term growth rate. Revenue has been growing at a reasonable clip, so it's debatable whether the share price growth of 6.8% full reflects the underlying business growth. The key question is whether revenue growth will slow down, and if so, how quickly. Lack of earnings means you have to project further into the future justify the valuation on the basis of future free cash flow.

You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).

NasdaqGS:AOSL Income Statement, August 23rd 2019

We like that insiders have been buying shares in the last twelve months. Even so, future earnings will be far more important to whether current shareholders make money. So we recommend checking out this free report showing consensus forecasts

A Different Perspective

While the broader market gained around 2.2% in the last year, Alpha and Omega Semiconductor shareholders lost 13%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 6.8%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.