Is FARO a Buy Ahead of Q2 Earnings Amid Strong Historical Performance and Sector Strength?

The Case for Value Investing in FARO: A Contrarian Play on Earnings Momentum

FARO Technologies (NASDAQ: FARO) has long been a polarizing name in the precision measurement and digital reality solutions sector. While its Q1 2025 results defied expectations, the stock remains 15.5% underperforming relative to its peers, creating a compelling case for value investors seeking undervalued momentum plays ahead of its Q2 earnings report.

Strong Historical Performance and Operational Turnaround

FARO’s Q1 2025 results underscored a hard-won operational turnaround. The company reported revenue of $82.86 million, exceeding Wall Street estimates by 3.3% despite a 1.6% year-over-year decline [3]. Non-GAAP earnings per share (EPS) of $0.33 blew past the consensus forecast of $0.16, while adjusted EBITDA of $12.47 million represented a 60.2% beat [5]. These figures reflect a dramatic improvement from the prior year, when the company posted a -6.3% operating margin [3].

The operating margin for Q1 2025 reached 4.7%, a stark contrast to the -6.3% recorded in the same period in 2024 [5]. Free cash flow, though down to 2.7% from 6.2% in Q1 2024, remains positive, with $5.0 million in cash flow from operations reported for the quarter [5]. Management attributed these gains to product innovations like the Leap ST handheld metrology tool and the Blink scanning solution, which are driving demand in industrial and healthcare markets [5].

Sector Peers Outperform, but FARO’s Guidance Suggests Resilience

While FARO’s Q1 performance was robust, its sector peers have posted mixed results. Trimble Inc., for instance, reported Q2 2025 revenue of $875.7 million, a 1% year-over-year increase and 8% organic growth, with non-GAAP operating margins hitting 25.4% [1]. Hexagon AB saw a 1% rise in net sales for H1 2025 but experienced a 10% decline in adjusted operating earnings (EBIT1) to €360.6 million [2]. Teledyne and Badger Meter also outperformed, with revenue growth of 10.2% and 23.2% year-over-year, respectively [6].

FARO’s Q2 2025 guidance, however, suggests resilience. The company expects revenue in the range of $79–$87 million, with a midpoint of $83 million, aligning with analyst forecasts [3]. Adjusted EPS guidance of $0.30 per share exceeds the $0.20 consensus estimate [3]. This optimism is rooted in continued product innovation and a backlog of $1.2 billion as of March 31, 2025 [5].

Share Price Underperformance: A Dislocation to Exploit

Despite these fundamentals, FARO’s stock has underperformed by 15.5% year-to-date relative to the S&P 500 and its sector peers [6]. Analysts cite concerns over declining free cash flow margins and a negative 12-month net income of -$893,000 [5]. However, this underperformance appears disconnected from the company’s operational reality.

The stock surged 20.2% post-Q1 earnings announcement, driven by optimism over product launches and margin expansion [6]. Yet, the average price target of $35.50 remains 19.3% below the current market price, suggesting a bearish bias among analysts [5]. This dislocation presents an opportunity for value investors who recognize that FARO’s Q1 results—particularly its 57.7% non-GAAP gross margin—signal a sustainable improvement in profitability [5].

Earnings Momentum and Strategic Catalysts

FARO’s earnings momentum is further bolstered by strategic initiatives. The company’s focus on 4D digital reality solutions—encompassing 3D scanning, metrology, and software integration—positions it to capitalize on industrial digitization trends [4]. Recent partnerships and product refreshes, such as the Leap ST and Blink solutions, are expected to drive recurring revenue streams and cross-selling opportunities [5].

Moreover, the company’s cash position of $102.6 million as of March 31, 2025, provides flexibility for R&D investments or shareholder returns [5]. While free cash flow margins have contracted, the $29.6 million year-over-year increase in operating cash flow for 2024 demonstrates the company’s ability to generate liquidity [1].

Risks and Considerations

Critics may highlight FARO’s exposure to cyclical industrial markets and its reliance on product innovation. The company’s 12-month profit margin of -0.26% [5] also raises questions about long-term sustainability. However, the recent margin expansion and strong Q1 execution suggest that these risks are being actively managed.

Conclusion: A Buy Ahead of Q2 Earnings

FARO Technologies represents a compelling value play for investors who can look past short-term volatility. Its Q1 2025 results, coupled with Q2 guidance and sector-leading product innovation, indicate a company on the cusp of a sustained turnaround. The 15.5% underperformance in share price offers a margin of safety, particularly for those betting on a Q2 earnings beat that could catalyze a re-rating.

As the company prepares to report Q2 results, the focus should remain on its ability to maintain margin expansion, execute on its product roadmap, and leverage its $1.2 billion backlog. For value investors, the combination of earnings momentum and undervaluation makes FARO a compelling addition to a diversified portfolio.

Source:
[1] Trimble Announces Second Quarter 2025 Results and Raises Full Year Guidance [https://investor.trimble.com/news/news-details/2025/Trimble-Announces-Second-Quarter-2025-Results-and-Raises-Full-Year-Guidance/default.aspx]
[2] Hexagon Interim Report 1 January - 30 June 2025 [https://hexagon.com/company/newsroom/press-releases/2025/hexagon-interim-report-1-january---30-june-2025]
[3] FARO (NASDAQ:FARO) Surprises With Strong Q1, Stock ... [https://finance.yahoo.com/news/faro-nasdaq-faro-surprises-strong-124349461.html]
[4] FARO Technologies, Inc. Reports First Quarter 2025 Financial Results [https://www.nasdaq.com/articles/faro-technologies-inc-reports-first-quarter-2025-financial-results-exceeding-expectations]
[5] FARO Q1 Earnings Call: Product Launches and Partnerships ... [https://finance.yahoo.com/news/faro-q1-earnings-call-product-104959385.html]
[6] Winners And Losers Of Q2: FARO (NASDAQ:FARO) Vs The ... [https://finance.yahoo.com/news/winners-losers-q2-faro-nasdaq-073502101.html]