3 Cash-Burning Stocks Walking a Fine Line

While some companies burn cash to fuel expansion, others struggle to turn spending into sustainable growth. A high cash burn rate without a strong balance sheet can leave investors exposed to significant downside.

Negative cash flow can lead to trouble, but StockStory helps you identify the businesses that stand a chance of making it through. That said, here are three cash-burning companies to avoid and some better opportunities instead.

Couchbase (BASE)

Trailing 12-Month Free Cash Flow Margin: -12.7%

Formed in 2011 with the merger of Membase and CouchOne, Couchbase (NASDAQ:BASE) is a database-as-a-service platform that allows enterprises to store large volumes of semi-structured data.

Why Is BASE Not Exciting?

1. Offerings struggled to generate meaningful interest as its average billings growth of 6.6% over the last year did not impress

2. Competitive market means the company must spend more on sales and marketing to stand out even if the return on investment is low

3. Cash burn makes us question whether it can achieve sustainable long-term growth

Couchbase is trading at $24.43 per share, or 5.5x forward price-to-sales. To fully understand why you should be careful with BASE, check out our full research report (it’s free).

LGI Homes (LGIH)

Trailing 12-Month Free Cash Flow Margin: -8.2%

Based in Texas, LGI Homes (NASDAQ:LGIH) is a homebuilding company specializing in constructing affordable, entry-level single-family homes in desirable communities across the United States.

Why Do We Steer Clear of LGIH?

1. Sales pipeline suggests its future revenue growth likely won’t meet our standards as its backlog hasn’t budged over the past two years

2. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

3. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

LGI Homes’s stock price of $51.52 implies a valuation ratio of 6.7x forward P/E. Read our free research report to see why you should think twice about including LGIH in your portfolio, it’s free.

SoundHound AI (SOUN)

Trailing 12-Month Free Cash Flow Margin: -104%

Founded in 2005, SoundHound AI (NASDAQ:SOUN) develops independent voice artificial intelligence solutions that enable businesses across various industries to offer customized conversational experiences to consumers.

Why Does SOUN Give Us Pause?

1. Gross margin of 44.1% is way below its competitors, leaving less money to invest in areas like marketing and R&D

2. Efficiency fell over the last year as its operating margin declined by 39 percentage points because it pursued growth instead of profits

3. Cash-burning history makes us doubt the long-term viability of its business model

At $10.75 per share, SoundHound AI trades at 27.1x forward price-to-sales. Check out our free in-depth research report to learn more about why SOUN doesn’t pass our bar.

High-Quality Stocks for All Market Conditions

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