Companies that burn cash at a rapid pace can run into serious trouble if they fail to secure funding. Without a clear path to profitability, these businesses risk dilution, mounting debt, or even bankruptcy.
Negative cash flow can lead to trouble, but StockStory helps you identify the businesses that stand a chance of making it through. Keeping that in mind, here are three cash-burning companies that don’t make the cut and some better opportunities instead.
The RealReal (REAL)
Trailing 12-Month Free Cash Flow Margin: -2.4%
Founded by consignment store aficionado Julie Wainwright, The RealReal (NASDAQ: REAL) is an online marketplace for buying and selling secondhand luxury goods.
Why Does REAL Worry Us?
- Customer spending has dipped by 5.5% on average as it focused on growing its users
- Negative free cash flow raises questions about the return timeline for its investments
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
The RealReal is trading at $5.65 per share, or 23.1x forward EV/EBITDA. Dive into our free research report to see why there are better opportunities than REAL.
Krispy Kreme (DNUT)
Trailing 12-Month Free Cash Flow Margin: -4.7%
Famous for its Original Glazed doughnuts and parent company of Insomnia Cookies, Krispy Kreme (NASDAQ: DNUT) is one of the most beloved and well-known fast-food chains in the world.
Why Do We Steer Clear of DNUT?
- Earnings per share have contracted by 100% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Krispy Kreme’s stock price of $4.36 implies a valuation ratio of 43.8x forward P/E. To fully understand why you should be careful with DNUT, check out our full research report (it’s free).
PacBio (PACB)
Trailing 12-Month Free Cash Flow Margin: -117%
Pioneering what scientists call "HiFi long-read sequencing," recognized as Nature Methods' method of the year for 2022, Pacific Biosciences (NASDAQ: PACB) develops advanced DNA sequencing systems that enable scientists and researchers to analyze genomes with unprecedented accuracy and completeness.
Why Are We Out on PACB?
- Muted 6.6% annual revenue growth over the last two years shows its demand lagged behind its healthcare peers
- Free cash flow margin dropped by 29.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $1.54 per share, PacBio trades at 2.8x forward price-to-sales. Read our free research report to see why you should think twice about including PACB in your portfolio.
Stocks We Like More
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