Running at a loss can be a red flag. Many of these businesses face mounting challenges as competition increases and funding becomes harder to secure.
Unprofitable companies face an uphill battle, but not all are created equal. Luckily for you, StockStory is here to separate the promising ones from the weak. Keeping that in mind, here are three unprofitable companiesto steer clear of and a few better alternatives.
C3.ai (AI)
Trailing 12-Month GAAP Operating Margin: -117%
Named after the three Cs of its original focus—carbon, cloud computing, and customer relationship management—C3.ai (NYSE:AI) provides enterprise AI software that helps organizations develop, deploy, and operate large-scale artificial intelligence applications across various industries.
Why Should You Dump AI?
- Offerings struggled to generate meaningful interest as its average billings growth of 3.8% over the last year did not impress
- Sky-high servicing costs result in an inferior gross margin of 51.8% that must be offset through increased usage
- Negative free cash flow raises questions about the return timeline for its investments
C3.ai’s stock price of $14.44 implies a valuation ratio of 6x forward price-to-sales. If you’re considering AI for your portfolio, see our FREE research report to learn more.
Stitch Fix (SFIX)
Trailing 12-Month GAAP Operating Margin: -3%
One of the original subscription box companies, Stitch Fix (NASDAQ:SFIX) is an online personal styling and fashion service that curates personalized clothing selections for customers.
Why Is SFIX Risky?
- Number of active clients has disappointed over the past two years, indicating weak demand for its offerings
- Poor free cash flow margin of 0.5% for the last two 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
Stitch Fix is trading at $5.24 per share, or 0.5x forward price-to-sales. To fully understand why you should be careful with SFIX, check out our full research report (it’s free for active Edge members).
Krispy Kreme (DNUT)
Trailing 12-Month GAAP Operating Margin: -30.9%
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 Think DNUT Will Underperform?
- Earnings per share have contracted by 28.6% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
At $4.53 per share, Krispy Kreme trades at 16.8x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than DNUT.
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