While strong cash flow is a key indicator of stability, it doesn’t always translate to superior returns. Some cash-heavy businesses struggle with inefficient spending, slowing demand, or weak competitive positioning.
Not all companies are created equal, and StockStory is here to surface the ones with real upside. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Five9 (FIVN)
Trailing 12-Month Free Cash Flow Margin: 9%
Started in 2001, Five9 (NASDAQ: FIVN) offers software-as-a-service that makes it easier for companies to set up and efficiently run call centers to offer more tailored customer support.
Why Does FIVN Worry Us?
- Sales trends were unexciting over the last three years as its 18% annual growth was below the typical software company
- Estimated sales growth of 8.4% for the next 12 months implies demand will slow from its three-year trend
- Bad unit economics and steep infrastructure costs are reflected in its gross margin of 54.7%, one of the worst among software companies
Five9’s stock price of $28.74 implies a valuation ratio of 2.2x forward price-to-sales. Read our free research report to see why you should think twice about including FIVN in your portfolio.
eBay (EBAY)
Trailing 12-Month Free Cash Flow Margin: 20.6%
Originally known as the first online auction site, eBay (NASDAQ: EBAY) is one of the world’s largest online marketplaces.
Why Is EBAY Not Exciting?
- Market opportunities are plateauing as its active buyers were flat over the last two years
- Estimated sales growth of 4% for the next 12 months is soft and implies weaker demand
- Day-to-day expenses have swelled relative to revenue over the last few years as its EBITDA margin fell by 5.7 percentage points
eBay is trading at $77.68 per share, or 11.3x forward EV/EBITDA. To fully understand why you should be careful with EBAY, check out our full research report (it’s free).
Dollar General (DG)
Trailing 12-Month Free Cash Flow Margin: 4.7%
Appealing to the budget-conscious consumer, Dollar General (NYSE: DG) is a discount retailer that sells a wide range of household essentials, groceries, apparel/beauty products, and seasonal merchandise.
Why Does DG Fall Short?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Gross margin of 29.9% is an output of its commoditized inventory
- High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $113.99 per share, Dollar General trades at 19.6x forward P/E. If you’re considering DG for your portfolio, see our FREE research report to learn more.
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