Unprofitable companies can burn through cash quickly, leaving investors exposed if they fail to turn things around. Without a clear path to profitability, these businesses risk running out of capital or relying on dilutive fundraising.

Unprofitable companies face an uphill battle, but not all are created equal. Luckily for you, StockStory is here to separate the promising ones from the weak. Keeping that in mind, here are three unprofitable companiesto avoid and some better opportunities instead.

Appian (APPN)

Trailing 12-Month GAAP Operating Margin: -9.9%

Founded by Matt Calkins and his three friends out of an apartment in Northern Virginia, Appian (NASDAQ: APPN) sells a software platform that lets its users build applications without using much code, allowing them to create new software more quickly.

Why Are We Cautious About APPN?

1. Annual revenue growth of 18.7% over the last three years was below our standards for the software sector
2. Poor expense management has led to operating losses
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.5% for the last year

At $31.15 per share, Appian trades at 3.4x forward price-to-sales. Dive into our free research report to see why there are better opportunities than APPN.

Topgolf Callaway (MODG)

Trailing 12-Month GAAP Operating Margin: -29.7%

Formed between the merger of Callaway and Topgolf, Topgolf Callaway (NYSE: MODG) sells golf equipment and operates technology-driven golf entertainment venues.

Why Are We Out on MODG?

1. Underwhelming constant currency revenue performance over the past two years suggests its product offering at current prices doesn’t resonate with customers
2. Poor free cash flow margin of -0.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Topgolf Callaway’s stock price of $6.50 implies a valuation ratio of 383.6x forward price-to-earnings. To fully understand why you should be careful with MODG, check out our full research report (it’s free).

Cogent (CCOI)

Trailing 12-Month GAAP Operating Margin: -19%

Operating a massive network spanning 20,000 miles of fiber optic cable and connecting to over 3,200 buildings worldwide, Cogent Communications (NASDAQ: CCOI) provides high-speed Internet access, private network services, and data center colocation to businesses and bandwidth-intensive organizations across 54 countries.

Why Do We Think Twice About CCOI?

1. 34.5 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
2. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

Cogent is trading at $56 per share, or 8.9x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why CCOI doesn’t pass our bar.

Stocks We Like More

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