3 Cash-Burning Stocks Walking a Fine Line

Companies that burn cash at a rapid pace can run into serious trouble if they fail to secure funding. Without a clear path to profitability, these businesses risk dilution, mounting debt, or even bankruptcy.

Negative cash flow can lead to trouble, but StockStory helps you identify the businesses that stand a chance of making it through. Keeping that in mind, here are three cash-burning companies that don’t make the cut and some better opportunities instead.

The RealReal (REAL)

Trailing 12-Month Free Cash Flow Margin: -2.4%

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 Worry Us?

1. Customer spending has dipped by 5.5% on average as it focused on growing its users
2. Negative free cash flow raises questions about the return timeline for its investments
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

The RealReal is trading at $5.65 per share, or 23.1x forward EV/EBITDA. Dive into our free research report to see why there are better opportunities than REAL.

Krispy Kreme (DNUT)

Trailing 12-Month Free Cash Flow Margin: -4.7%

Famous for its Original Glazed doughnuts and parent company of Insomnia Cookies, Krispy Kreme (NASDAQ:DNUT) is one of the most beloved and well-known fast-food chains in the world.

Why Do We Steer Clear of DNUT?

1. Earnings per share have contracted by 100% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
2. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

Krispy Kreme’s stock price of $4.36 implies a valuation ratio of 43.8x forward P/E. To fully understand why you should be careful with DNUT, check out our full research report (it’s free).

PacBio (PACB)

Trailing 12-Month Free Cash Flow Margin: -117%

Pioneering what scientists call "HiFi long-read sequencing," recognized as Nature Methods' method of the year for 2022, Pacific Biosciences (NASDAQ:PACB) develops advanced DNA sequencing systems that enable scientists and researchers to analyze genomes with unprecedented accuracy and completeness.

Why Are We Out on PACB?

1. Muted 6.6% annual revenue growth over the last two years shows its demand lagged behind its healthcare peers
2. Free cash flow margin dropped by 29.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

At $1.54 per share, PacBio trades at 2.8x forward price-to-sales. Read our free research report to see why you should think twice about including PACB in your portfolio.

Stocks We Like More

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