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.
A lack of profits 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 unprofitable companiesto avoid and some better opportunities instead.
Snap (SNAP)
Trailing 12-Month GAAP Operating Margin: -11.6%
Founded by Stanford University students Evan Spiegel, Reggie Brown, and Bobby Murphy, and originally called Picaboo, Snapchat (NYSE: SNAP) is an image centric social media network.
Why Does SNAP Give Us Pause?
- 7.5% annual revenue growth over the last three years was slower than its consumer internet peers
- Focus on expanding its platform has led to weaker growth in its average revenue per user
- Earnings per share fell by 2.3% annually over the last three years while its revenue grew, partly because it diluted shareholders
Snap is trading at $7.06 per share, or 19x forward EV/EBITDA. Check out our free in-depth research report to learn more about why SNAP doesn’t pass our bar.
Array (ARRY)
Trailing 12-Month GAAP Operating Margin: -17.2%
Going public in October 2020, Array (NASDAQ:ARRY) is a global manufacturer of ground-mounting tracking systems for utility and distributed generation solar energy projects.
Why Should You Sell ARRY?
- Underwhelming unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
- Poor free cash flow margin of -0.4% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $8.27 per share, Array trades at 12.1x forward P/E. Dive into our free research report to see why there are better opportunities than ARRY.
Evolent Health (EVH)
Trailing 12-Month GAAP Operating Margin: -1.7%
Founded in 2011 to transform how healthcare is delivered to patients with complex needs, Evolent Health (NYSE:EVH) provides specialty care management services and technology solutions that help health plans and providers deliver better care for patients with complex conditions.
Why Do We Think Twice About EVH?
- Estimated sales decline of 3.9% for the next 12 months implies a challenging demand environment
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.2% for the last five years
- Push for growth has led to negative returns on capital, signaling value destruction
Evolent Health’s stock price of $8.79 implies a valuation ratio of 20x forward P/E. Read our free research report to see why you should think twice about including EVH in your portfolio.
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