A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
Luckily for you, we built StockStory to help you separate the good from the bad. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.
Unity (U)
Trailing 12-Month Free Cash Flow Margin: 21.7%
Powering over half of the world's mobile games and expanding into industries from automotive to architecture, Unity (NYSE: U) provides software tools and services that allow developers to create, run, and monetize interactive 2D and 3D content across multiple platforms.
Why Do We Pass on U?
- Products, pricing, or go-to-market strategy need some adjustments as its billings have averaged 2.5% declines over the last year
- Anticipated sales growth of 12.2% for the next year implies demand will be shaky
- Poor expense management has led to operating margin losses
At $44.06 per share, Unity trades at 8.8x forward price-to-sales. Check out our free in-depth research report to learn more about why U doesn’t pass our bar.
DigitalOcean (DOCN)
Trailing 12-Month Free Cash Flow Margin: 20.6%
Built for simplicity in a world of complex cloud solutions, DigitalOcean (NYSE: DOCN) provides a simplified cloud computing platform that enables developers and small businesses to quickly deploy and scale applications.
Why Are We Wary of DOCN?
- Average ARR growth of 14.2% over the last year has disappointed, suggesting it’s had a hard time winning long-term deals and renewals
- Net revenue retention rate of 99.2% shows it has a tough time retaining customers
- Sky-high servicing costs result in an inferior gross margin of 59.5% that must be offset through increased usage
DigitalOcean is trading at $53.09 per share, or 5.5x forward price-to-sales. Read our free research report to see why you should think twice about including DOCN in your portfolio.
American Airlines (AAL)
Trailing 12-Month Free Cash Flow Margin: 1.6%
One of the ‘Big Four’ airlines in the US, American Airlines (NASDAQ: AAL) is a major global air carrier that serves both business and leisure travelers through its domestic and international flights.
Why Should You Sell AAL?
- Sluggish trends in its revenue passenger miles suggest customers aren’t adopting its solutions as quickly as the company hoped
- Free cash flow margin is projected to show no improvement next year
- 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
American Airlines’s stock price of $15.69 implies a valuation ratio of 9x forward P/E. If you’re considering AAL for your portfolio, see our FREE research report to learn more.
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