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.
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 companiesto avoid and some better opportunities instead.
Varonis Systems (VRNS)
Trailing 12-Month GAAP Operating Margin: -20.4%
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 Do We Think Twice About VRNS?
- Annual revenue growth of 11% over the last three years was below our standards for the software sector
- Suboptimal cost structure is highlighted by its history of operating margin losses
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 2.9 percentage points
Varonis Systems is trading at $56.20 per share, or 9.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than VRNS.
Sweetgreen (SG)
Trailing 12-Month GAAP Operating Margin: -15.7%
Founded in 2007 by three Georgetown University alum, Sweetgreen (NYSE:SG) is a casual quick service chain known for its healthy salads and bowls.
Why Are We Cautious About SG?
- Persistent operating margin losses suggest the business manages its expenses poorly
- Free cash flow margin shrank by 7.3 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $8.49 per share, Sweetgreen trades at 24.7x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why SG doesn’t pass our bar.
American Outdoor Brands (AOUT)
Trailing 12-Month GAAP Operating Margin: -2.1%
Spun off from Smith and Wesson in 2020, American Outdoor Brands (NASDAQ:AOUT) is an outdoor and recreational products company that offers outdoor and shooting sports products but does not sell firearms themselves.
Why Is AOUT Risky?
- 2.6% annual revenue growth over the last five years was slower than its consumer discretionary peers
- Earnings per share have contracted by 34.3% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
American Outdoor Brands’s stock price of $8.81 implies a valuation ratio of 7.6x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including AOUT in your portfolio.
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