A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
Luckily for you, we built StockStory to help you separate the good from the bad. Keeping that in mind, here are three cash-producing companies to steer clear of and a few better alternatives.
CarGurus (CARG)
Trailing 12-Month Free Cash Flow Margin: 24.9%
Bringing transparency to a sometimes opaque process, CarGurus (NASDAQ: CARG) is a digital marketplace where auto dealers can connect with potential customers and where car buyers can browse, purchase, and obtain financing.
Why Does CARG Fall Short?
- Sales tumbled by 15.1% annually over the last three years, showing consumer trends are working against its favor
- May need to improve its platform and marketing strategy as its 1.7% average growth in paying dealers underwhelmed
- Projected sales growth of 3.4% for the next 12 months suggests sluggish demand
At $33.99 per share, CarGurus trades at 10.6x forward EV/EBITDA. To fully understand why you should be careful with CARG, check out our full research report (it’s free for active Edge members).
Integral Ad Science (IAS)
Trailing 12-Month Free Cash Flow Margin: 26.4%
Processing over 280 billion digital ad interactions daily through its AI-powered technology, Integral Ad Science (NASDAQ: IAS) provides a cloud-based platform that measures and verifies digital advertising across devices, channels, and formats to ensure ads are viewable, fraud-free, and brand-safe.
Why Are We Hesitant About IAS?
- 14% annual revenue growth over the last two years was slower than its software peers
- Operating profits increased over the last year as the company gained some leverage on its fixed costs and became more efficient
- Projected 7.9 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
Integral Ad Science is trading at $10.18 per share, or 2.7x forward price-to-sales. Read our free research report to see why you should think twice about including IAS in your portfolio.
Genpact (G)
Trailing 12-Month Free Cash Flow Margin: 11.4%
Originally spun off from General Electric in 2005 to provide business process services, Genpact (NYSE: G) is a global professional services firm that helps businesses transform their operations through digital technology, AI, and data analytics solutions.
Why Is G Not Exciting?
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 4.9%
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 3.9 percentage points
Genpact’s stock price of $39.52 implies a valuation ratio of 10.8x forward P/E. Check out our free in-depth research report to learn more about why G doesn’t pass our bar.
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