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. That said, here are three cash-burning companies to avoid and some better opportunities instead.
Upstart (UPST)
Trailing 12-Month Free Cash Flow Margin: -45.5%
Using over 2,500 data variables and trained on nearly 82 million repayment events, Upstart (NASDAQ: UPST) is an AI-powered lending platform that uses machine learning to help banks and credit unions more accurately assess borrower risk for personal loans, auto loans, and home equity lines of credit.
Why Is UPST Not Exciting?
- Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Upstart is trading at $48.96 per share, or 4.4x forward price-to-sales. To fully understand why you should be careful with UPST, check out our full research report (it’s free for active Edge members).
Purple (PRPL)
Trailing 12-Month Free Cash Flow Margin: -6.2%
Founded by two brothers, Purple (NASDAQ: PRPL) creates sleep and home comfort products such as mattresses, pillows, and bedding accessories.
Why Do We Avoid PRPL?
- Products and services have few die-hard fans as sales have declined by 5.3% annually over the last five years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $0.82 per share, Purple trades at 5.9x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including PRPL in your portfolio.
Moderna (MRNA)
Trailing 12-Month Free Cash Flow Margin: -119%
Rising to global prominence during the COVID-19 pandemic with one of the first effective vaccines, Moderna (NASDAQ: MRNA) develops messenger RNA (mRNA) medicines that direct the body's cells to produce proteins with therapeutic or preventive benefits for various diseases.
Why Is MRNA Risky?
- Annual sales declines of 50.5% for the past two years show its products and services struggled to connect with the market during this cycle
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 215.1 percentage points
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Moderna’s stock price of $29.35 implies a valuation ratio of 7x forward price-to-sales. If you’re considering MRNA for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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