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 steer clear of and a few better alternatives.
Health Catalyst (HCAT)
Trailing 12-Month Free Cash Flow Margin: -8.1%
Built on its "Health Catalyst Flywheel" methodology that emphasizes measurable outcomes, Health Catalyst (NASDAQ:HCAT) provides data and analytics technology and services that help healthcare organizations manage their data and drive measurable clinical, financial, and operational improvements.
Why Is HCAT Risky?
- Muted 5.4% annual revenue growth over the last two years shows its demand lagged behind its software peers
- Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
At $3.03 per share, Health Catalyst trades at 0.7x forward price-to-sales. Read our free research report to see why you should think twice about including HCAT in your portfolio.
The Honest Company (HNST)
Trailing 12-Month Free Cash Flow Margin: -1.5%
Co-founded by actress Jessica Alba, The Honest Company (NASDAQ:HNST) sells diapers and wipes, skin care products, and household cleaning products.
Why Are We Out on HNST?
- Revenue base of $389.8 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Free cash flow margin dropped by 6.6 percentage points over the last year, implying the company became more capital intensive as competition picked up
- Negative returns on capital show management lost money while trying to expand the business
The Honest Company’s stock price of $3.66 implies a valuation ratio of 14.2x forward EV-to-EBITDA. To fully understand why you should be careful with HNST, check out our full research report (it’s free for active Edge members).
Applied Digital (APLD)
Trailing 12-Month Free Cash Flow Margin: -456%
Pivoting from its origins in cryptocurrency mining to become a key player in the AI infrastructure boom, Applied Digital (NASDAQ:APLD) designs and operates specialized data centers that provide high-performance computing infrastructure for artificial intelligence and blockchain applications.
Why Does APLD Give Us Pause?
- Earnings per share fell by 83.8% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- 54.3 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Applied Digital is trading at $36.20 per share, or 94.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why APLD doesn’t pass our bar.
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