Unprofitable companies face headwinds as they struggle to keep operating expenses under control. Some may be investing heavily, but the majority fail to convert spending into sustainable growth.
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 avoid and some better opportunities instead.
PlayStudios (MYPS)
Trailing 12-Month GAAP Operating Margin: -14.9%
Founded by a team of former gaming industry executives, PlayStudios (NASDAQ: MYPS) offers free-to-play digital casino games.
Why Do We Pass on MYPS?
- Products and services aren’t resonating with the market as its revenue declined by 4.2% annually over the last five years
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 13.3% for the last two years
- Improving returns on capital suggest management is identifying more profitable investments
At $0.56 per share, PlayStudios trades at 0.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than MYPS.
Target Hospitality (TH)
Trailing 12-Month GAAP Operating Margin: -14.8%
Building mini-communities at places such as oil drilling sites, Target Hospitality (NASDAQ: TH) is a provider of specialty workforce lodging accommodations and services.
Why Should You Sell TH?
- Number of utilized beds has disappointed over the past two years, indicating weak demand for its offerings
- Low free cash flow margin of 9% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Target Hospitality’s stock price of $20.62 implies a valuation ratio of 4.4x forward price-to-sales. Read our free research report to see why you should think twice about including TH in your portfolio.
Mayville Engineering (MEC)
Trailing 12-Month GAAP Operating Margin: -2.4%
Originally founded solely on tool and die manufacturing, Mayville Engineering Company (NYSE: MEC) specializes in metal fabrication, tube bending, and welding to be used in various industries.
Why Are We Cautious About MEC?
- Annual sales declines of 4.3% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share have dipped by 42.7% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
Mayville Engineering is trading at $35.66 per share, or 70.3x forward P/E. To fully understand why you should be careful with MEC, check out our full research report (it’s free).
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