Unprofitable companies face headwinds as they struggle to keep operating expenses under control. Some may be investing heavily, but the majority fail to convert spending into sustainable growth.
Finding the right unprofitable companies is difficult, which is why we started StockStory - to help you navigate the market. That said, here are three unprofitable companiesthat don’t make the cut and some better opportunities instead.
Varonis Systems (VRNS)
Trailing 12-Month GAAP Operating Margin: -23.5%
Beginning with protecting Windows file shares in 2005 and evolving into a comprehensive security platform, Varonis Systems (NASDAQ: VRNS) provides data security software that helps organizations protect sensitive information, detect threats, and comply with privacy regulations.
Why Does VRNS Fall Short?
- 11.8% annual revenue growth over the last two years was slower than its software peers
- Efficiency has decreased over the last year as its operating margin fell by 2.1 percentage points
- Free cash flow margin is forecasted to shrink by 6.5 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
Varonis Systems is trading at $22.23 per share, or 3.5x forward price-to-sales. Read our free research report to see why you should think twice about including VRNS in your portfolio.
Purple (PRPL)
Trailing 12-Month GAAP Operating Margin: -10.6%
Founded by two brothers, Purple (NASDAQ: PRPL) creates sleep and home comfort products such as mattresses, pillows, and bedding accessories.
Why Do We Pass on PRPL?
- Products and services aren't resonating with the market as its revenue declined by 5.3% annually over the last five years
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $0.63 per share, Purple trades at 16.5x forward EV-to-EBITDA. If you’re considering PRPL for your portfolio, see our FREE research report to learn more.
Xerox (XRX)
Trailing 12-Month GAAP Operating Margin: -1.8%
Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ: XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.
Why Do We Avoid XRX?
- Sales stagnated over the last five years and signal the need for new growth strategies
- 5.5 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
- 8× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Xerox’s stock price of $1.44 implies a valuation ratio of 3.1x forward P/E. Dive into our free research report to see why there are better opportunities than XRX.
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