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 avoid and some better opportunities instead.
The RealReal (REAL)
Trailing 12-Month Free Cash Flow Margin: -2.6%
Founded by consignment store aficionado Julie Wainwright, The RealReal (NASDAQ: REAL) is an online marketplace for buying and selling secondhand luxury goods.
Why Does REAL Fall Short?
- Sales trends were unexciting over the last three years as its 4.1% annual growth was below the typical consumer internet company
- Focus on expanding its platform came at the expense of monetization as its average revenue per user fell by 11.7% annually
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
The RealReal is trading at $10.69 per share, or 35.4x forward EV/EBITDA. Read our free research report to see why you should think twice about including REAL in your portfolio.
Custom Truck One Source (CTOS)
Trailing 12-Month Free Cash Flow Margin: -9.4%
Inspired by a family gas station, Custom Truck One Source (NYSE: CTOS) is a distributor of trucks and heavy equipment.
Why Does CTOS Give Us Pause?
- 4.1% annual revenue growth over the last two years was slower than its industrials peers
- Earnings per share have contracted by 52% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- 24.4 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
At $5.99 per share, Custom Truck One Source trades at 62.1x forward P/E. To fully understand why you should be careful with CTOS, check out our full research report (it’s free).
EVgo (EVGO)
Trailing 12-Month Free Cash Flow Margin: -28.4%
Created through a settlement between NRG Energy and the California Public Utilities Commission, EVgo (NASDAQ: EVGO) is a provider of electric vehicle charging solutions, operating fast charging stations across the United States.
Why Does EVGO Worry Us?
- Earnings per share have dipped by 30.6% annually over the past three years, which is concerning because stock prices follow EPS over the long term
- Cash-burning history makes us doubt the long-term viability of its business model
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
EVgo’s stock price of $4.65 implies a valuation ratio of 21.2x forward EV-to-EBITDA. If you’re considering EVGO for your portfolio, see our FREE research report to learn more.
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