Generating cash is essential for any business, but not all cash-rich companies are great investments. Some produce plenty of cash but fail to allocate it effectively, leading to missed opportunities.
Not all companies are created equal, and StockStory is here to surface the ones with real upside. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Twilio (TWLO)
Trailing 12-Month Free Cash Flow Margin: 17%
Known for the clever "Twilio Magic" demo that had developers creating functioning communications apps in minutes, Twilio (NYSE: TWLO) provides a platform that enables businesses to communicate with their customers through voice, messaging, email, and other digital channels.
Why Does TWLO Worry Us?
- Customers generally do not adopt complementary products as its 110% net revenue retention rate lags behind the industry standard
- Gross margin of 48.7% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Operating profits increased over the last year as the company gained some leverage on its fixed costs and became more efficient
Twilio’s stock price of $209.19 implies a valuation ratio of 5.5x forward price-to-sales. Check out our free in-depth research report to learn more about why TWLO doesn’t pass our bar.
Amplitude (AMPL)
Trailing 12-Month Free Cash Flow Margin: 5.5%
Born from the realization that companies were flying blind when it came to understanding user behavior in their digital products, Amplitude (NASDAQ: AMPL) provides a digital analytics platform that helps businesses understand how people use their digital products to improve user experiences and drive revenue growth.
Why Are We Wary of AMPL?
- Struggled to drive increased usage of its software, demonstrated by its subpar 103% net revenue retention rate
- Suboptimal cost structure is highlighted by its history of operating margin losses
- Poor free cash flow margin of 5.5% for the last year limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $8.68 per share, Amplitude trades at 2.4x forward price-to-sales. To fully understand why you should be careful with AMPL, check out our full research report (it’s free).
MGM Resorts (MGM)
Trailing 12-Month Free Cash Flow Margin: 8.8%
Operating several properties on the Las Vegas Strip, MGM Resorts (NYSE: MGM) is a global hospitality and entertainment company known for its resorts and casinos.
Why Do We Steer Clear of MGM?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 3.1% over the last two years was below our standards for the consumer discretionary sector
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
MGM Resorts is trading at $47.52 per share, or 25x forward P/E. Dive into our free research report to see why there are better opportunities than MGM.
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