Companies with more cash than debt can be financially resilient, but that doesn’t mean they’re all strong investments. Some lack leverage because they struggle to grow or generate consistent profits, making them unattractive borrowers.
Just because a business has cash doesn’t mean it’s a good investment. Luckily, StockStory is here to help you separate the winners from the losers. Keeping that in mind, here are three companies with net cash positions that don’t make the cut and some better choices instead.
Elastic (ESTC)
Net Cash Position: $802.2 million (8.8% of Market Cap)
Started by Shay Banon as a search engine for his wife's growing list of recipes at Le Cordon Bleu cooking school in Paris, Elastic (NYSE: ESTC) helps companies integrate search into their products and monitor their cloud infrastructure.
Why Is ESTC Not Exciting?
- Sales trends were unexciting over the last three years as its 19.8% annual growth was below the typical software company
- Persistent operating margin losses suggest the business manages its expenses poorly
- Projected 1.7 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
Elastic’s stock price of $86.56 implies a valuation ratio of 5.5x forward price-to-sales. To fully understand why you should be careful with ESTC, check out our full research report (it’s free).
Sprout Social (SPT)
Net Cash Position: $64.44 million (5.4% of Market Cap)
Founded by Justyn Howard and Aaron Rankin in 2010, Sprout Social (NASDAQ: SPT) provides a software as a service platform that companies can use to schedule and respond to posts on major social media networks like Twitter, Facebook, Instagram, Youtube and LinkedIn.
Why Does SPT Worry Us?
- Rapid expansion strategy came at the expense of operating margin profitability
- Poor free cash flow margin of 7.2% for the last year limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $20.75 per share, Sprout Social trades at 2.6x forward price-to-sales. Dive into our free research report to see why there are better opportunities than SPT.
Guidewire (GWRE)
Net Cash Position: $213.7 million (1.1% of Market Cap)
Founded by two individuals involved in the development of leading procurement software Ariba, Guidewire (NYSE: GWRE) offers insurance companies a software-as-a-service platform to help sell their products and manage their workflows.
Why Are We Cautious About GWRE?
- Revenue increased by 12.6% annually over the last three years, acceptable on an absolute basis but tepid for a software company enjoying secular tailwinds
- Gross margin of 61.9% is below its competitors, leaving less money to invest in areas like marketing and R&D
Guidewire is trading at $231.25 per share, or 15.2x forward price-to-sales. Check out our free in-depth research report to learn more about why GWRE doesn’t pass our bar.
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