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 steer clear of and a few better alternatives.
Elastic (ESTC)
Trailing 12-Month GAAP Operating Margin: -2%
Built on the powerful open-source Elasticsearch technology that powers search functionality for thousands of websites worldwide, Elastic (NYSE: ESTC) provides a search and AI platform that helps organizations find insights from their data, monitor applications, and protect against security threats.
Why Do We Think Twice About ESTC?
- Sales trends were unexciting over the last three years as its 19% annual growth was below the typical software company
- Suboptimal cost structure is highlighted by its history of operating margin losses
- Projected 1.3 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position
Elastic is trading at $84.99 per share, or 5.2x forward price-to-sales. Dive into our free research report to see why there are better opportunities than ESTC.
Sprout Social (SPT)
Trailing 12-Month GAAP Operating Margin: -12.6%
Born from the recognition that businesses needed a centralized way to handle their growing social media presence, Sprout Social (NASDAQ: SPT) provides a comprehensive software platform that helps businesses manage, analyze, and optimize their presence across various social media networks.
Why Does SPT Give Us Pause?
- Historical operating margin losses show it had an inefficient cost structure while scaling
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
At $15.79 per share, Sprout Social trades at 1.9x forward price-to-sales. If you’re considering SPT for your portfolio, see our FREE research report to learn more.
Lumen (LUMN)
Trailing 12-Month GAAP Operating Margin: -1.7%
With approximately 350,000 route miles of fiber optic cable spanning North America and the Asia Pacific, Lumen Technologies (NYSE: LUMN) operates a vast fiber optic network that provides communications, cloud connectivity, security, and IT solutions to businesses and consumers.
Why Do We Think LUMN Will Underperform?
- Annual sales declines of 9.5% for the past five years show its products and services struggled to connect with the market during this cycle
- Sales were less profitable over the last five years as its earnings per share fell by 16.4% annually, worse than its revenue declines
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 9.2 percentage points
Lumen’s stock price of $4.99 implies a valuation ratio of 1.5x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why LUMN doesn’t pass our bar.
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