3 Cash-Burning Stocks We're Skeptical Of

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 steer clear of and a few better alternatives.

Health Catalyst (HCAT)

Trailing 12-Month Free Cash Flow Margin: -8.1%

Built on its "Health Catalyst Flywheel" methodology that emphasizes measurable outcomes, Health Catalyst (NASDAQ:HCAT) provides data and analytics technology and services that help healthcare organizations manage their data and drive measurable clinical, financial, and operational improvements.

Why Is HCAT Risky?

1. Muted 5.4% annual revenue growth over the last two years shows its demand lagged behind its software peers
2. Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

At $3.03 per share, Health Catalyst trades at 0.7x forward price-to-sales. Read our free research report to see why you should think twice about including HCAT in your portfolio.

The Honest Company (HNST)

Trailing 12-Month Free Cash Flow Margin: -1.5%

Co-founded by actress Jessica Alba, The Honest Company (NASDAQ:HNST) sells diapers and wipes, skin care products, and household cleaning products.

Why Are We Out on HNST?

1. Revenue base of $389.8 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
2. Free cash flow margin dropped by 6.6 percentage points over the last year, implying the company became more capital intensive as competition picked up
3. Negative returns on capital show management lost money while trying to expand the business

The Honest Company’s stock price of $3.66 implies a valuation ratio of 14.2x forward EV-to-EBITDA. To fully understand why you should be careful with HNST, check out our full research report (it’s free for active Edge members).

Applied Digital (APLD)

Trailing 12-Month Free Cash Flow Margin: -456%

Pivoting from its origins in cryptocurrency mining to become a key player in the AI infrastructure boom, Applied Digital (NASDAQ:APLD) designs and operates specialized data centers that provide high-performance computing infrastructure for artificial intelligence and blockchain applications.

Why Does APLD Give Us Pause?

1. Earnings per share fell by 83.8% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
2. 54.3 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
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Applied Digital is trading at $36.20 per share, or 94.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why APLD doesn’t pass our bar.

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