While some companies burn cash to fuel expansion, others struggle to turn spending into sustainable growth. A high cash burn rate without a strong balance sheet can leave investors exposed to significant downside.
Just because a company is spending heavily doesn’t mean it’s on the right track, and StockStory is here to separate the winners from the losers. That said, here are three cash-burning companies to avoid and some better opportunities instead.
C3.ai (AI)
Trailing 12-Month Free Cash Flow Margin: -23.1%
Named after the three Cs of its original focus—carbon, cloud computing, and customer relationship management—C3.ai (NYSE: AI) provides enterprise AI software that helps organizations develop, deploy, and operate large-scale artificial intelligence applications across various industries.
Why Is AI Risky?
- Offerings struggled to generate meaningful interest as its average billings growth of 12.4% over the last year did not impress
- Gross margin of 56.6% is way below its competitors, leaving less money to invest in areas like marketing and R&D
- Cash-burning history makes us doubt the long-term viability of its business model
C3.ai is trading at $19.15 per share, or 8.4x forward price-to-sales. If you’re considering AI for your portfolio, see our FREE research report to learn more.
Sphere Entertainment (SPHR)
Trailing 12-Month Free Cash Flow Margin: -4%
Famous for its viral Las Vegas Sphere venue, Sphere Entertainment (NYSE: SPHR) hosts live entertainment events and distributes content across various media platforms.
Why Should You Sell SPHR?
- 7.6% annual revenue growth over the last five years was slower than its consumer discretionary peers
- 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
Sphere Entertainment’s stock price of $62 implies a valuation ratio of 12.9x forward EV-to-EBITDA. To fully understand why you should be careful with SPHR, check out our full research report (it’s free for active Edge members).
Purple (PRPL)
Trailing 12-Month Free Cash Flow Margin: -5.8%
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 2.9% annually over the last five years
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $0.92 per share, Purple trades at 7.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why PRPL doesn’t pass our bar.
Stocks We Like More
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