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 is one unprofitable company investing heavily to secure market share and two best left off your radar.
Two Stocks to Sell:
Grocery Outlet (GO)
Trailing 12-Month GAAP Operating Margin: -4.7%
Due to its differentiated procurement and buying approach, Grocery Outlet (NASDAQ: GO) is a discount grocery store chain that offers substantial discounts on name-brand products.
Why Are We Out on GO?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Efficiency has decreased over the last year as its operating margin fell by 6.5 percentage points
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Grocery Outlet’s stock price of $6.09 implies a valuation ratio of 12.7x forward P/E. To fully understand why you should be careful with GO, check out our full research report (it’s free).
Baxter (BAX)
Trailing 12-Month GAAP Operating Margin: -2.7%
With a history dating back to 1931 and products used in over 100 countries, Baxter International (NYSE: BAX) provides essential healthcare products including dialysis therapies, IV solutions, infusion systems, surgical products, and patient monitoring technologies to hospitals and clinics worldwide.
Why Should You Dump BAX?
- Constant currency revenue growth has disappointed over the past two years and shows demand was soft
- Sales over the last five years were less profitable as its earnings per share fell by 6% annually while its revenue was flat
- Underwhelming -0.9% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its falling returns suggest its earlier profit pools are drying up
At $17.12 per share, Baxter trades at 9.1x forward P/E. Dive into our free research report to see why there are better opportunities than BAX.
One Stock to Buy:
JFrog (FROG)
Trailing 12-Month GAAP Operating Margin: -17.3%
Named after the amphibian that continuously evolves from egg to tadpole to adult, JFrog (NASDAQ: FROG) provides a platform that helps organizations securely create, store, manage, and distribute software packages across any system.
Why Is FROG a Top Pick?
- Customers view its software as mission-critical to their operations as its ARR has averaged 23.6% growth over the last year
- Software platform has product-market fit given the rapid recovery of its customer acquisition costs
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
JFrog is trading at $43.17 per share, or 7.8x forward price-to-sales. Is now the time to initiate a position? Find out in our full research report, it’s free.
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