Rapid spending isn’t always a sign of progress. Some cash-burning businesses fail to convert investments into meaningful competitive advantages, leaving them vulnerable.
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 to steer clear of and a few better alternatives.
Chegg (CHGG)
Trailing 12-Month Free Cash Flow Margin: -8%
Started as a physical textbook rental service, Chegg (NYSE: CHGG) is now a digital platform addressing student pain points by providing study and academic assistance.
Why Do We Pass on CHGG?
- Intense competition is diverting traffic from its platform as its services subscribers fell by 23.3% annually
- Overall productivity fell over the last few years as its plummeting sales were accompanied by a decline in its EBITDA margin
- Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 54.2% annually, worse than its revenue
At $1.04 per share, Chegg trades at 3.9x forward EV/EBITDA. To fully understand why you should be careful with CHGG, check out our full research report (it’s free).
Ameresco (AMRC)
Trailing 12-Month Free Cash Flow Margin: -16.5%
Having played a role in upgrading the energy solutions of Alcatraz Island, Ameresco (NYSE: AMRC) provides energy and renewable energy solutions for various sectors.
Why Is AMRC Not Exciting?
- Issuance of new shares over the last five years caused its earnings per share to fall by 12% annually while its revenue grew
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Ameresco is trading at $27.61 per share, or 24.1x forward P/E. Dive into our free research report to see why there are better opportunities than AMRC.
PacBio (PACB)
Trailing 12-Month Free Cash Flow Margin: -72.6%
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 Cautious About PACB?
- Sales tumbled by 10.6% annually over the last two years, showing market trends are working against it during this cycle
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Negative earnings profile makes it challenging to secure favorable financing terms from lenders
PacBio’s stock price of $1.69 implies a valuation ratio of 3x forward price-to-sales. If you’re considering PACB for your portfolio, see our FREE research report to learn more.
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