Investors should be wary when it comes to cash-burning companies. These are businesses that aren't generating positive cash flow from their day-to-day operations. Not only does that mean their operations aren't sustainable, but it might mean their future survival depends on new sources of funding. That includes new share offerings, which dilute investors and send stock prices crashing.
Three cash-burning stocks that are particularly concerning are Canopy Growth (NASDAQ: CGC), Plug Power (NASDAQ: PLUG), and SoundHound AI (NASDAQ: SOUN).
Canopy Growth
Canadian cannabis producer Canopy Growth has made a lot of changes over the years to slim down its business and cut costs, but it has failed to result in a sustainable, cash-generating operation. Cannabis companies often like to show progress in terms of adjusted earnings numbers. But oftentimes, those calculations can be complex and make it difficult to determine whether the company really did well.
One metric that doesn't lie is operating cash flow, the cash a company generates from its normal operations. This is what cannabis investors should focus on. And in its most recent fiscal year, which ended on March 31, Canopy Growth reported an outflow of cash from its day-to-day continuing operations totaling 228.4 million Canadian dollars. While it is an improvement from a year ago, when the cash burn totaled CA$394.4 million, this is a company that's still in deep trouble from a financial point of view. It had just CA$170.3 million in cash and cash equivalents as of the end of the quarter, and so it's no surprise the company announced an offering in June for $250 million, roughly a third of its market cap at recent prices.
While Canopy Growth will desperately try to convince investors of its amazing growth opportunities in the U.S. market (which remains off-limits until the U.S. actually legalizes pot), investors shouldn't bother with this stock until it shows significantly more improvements in its cash flow. This is a stock that faces a very risky and uncertain future.
Plug Power
Another company that recently announced an offering is Plug Power. The green energy business, which specializes in hydrogen solutions, hasn't proven that it can sustain its own operations. And regardless of which energy source may be the most promising one in the future, Plug Power may not necessarily be the one to profit from those opportunities if it can't keep its operations afloat.
In July, the company announced a $200 million stock offering that it plans to use for "general corporate purposes," which essentially can cover just about anything. But it suggests the same thing -- the company's operations aren't sustainable and it needs the offering to fill in holes in its financials.
During just the first three months of 2024, Plug Power used up $167.7 million in its day-to-day operations. That's an improvement from the $276.9 million it burned through last year, but it's still a hefty figure nonetheless. Plug Power had $172.9 million in cash and cash equivalents as of the end of the quarter plus another $219.6 million in restricted cash on its books.
The rapid cash burn Plug Power is experiencing is concerning. While the company believes it is no longer facing a going concern risk, I'm not convinced the company is in good enough financial shape to warrant any kind of an investment in its business right now.
SoundHound AI
Shares of SoundHound AI have more than doubled this year, but that isn't on the merits of its own operations. Instead, it was due to the hype surrounding an investment from chipmaker Nvidia. SoundHound's own financials leave much to be desired.
The company is a relatively small player in what's a growing field of artificial intelligence (AI) companies. Its AI voice platform can supposedly transform the order-taking process at drive-thrus and be integrated into vehicles. But proving that its business is sustainable its still far from reality.
While AI investors may love the 73% revenue growth SoundHound achieved in the first three months of the year, with sales hitting just under $11.6 million, it's still a fairly modest amount of revenue compared to many other AI businesses. And the company's net loss was nearly 3 times the size of its top line, totaling more than $33 million. SoundHound's operating cash burn for the period also totaled $21.9 million, which was an increase from $14.5 million in the same period last year.
SoundHound AI has some breathing room with $117.1 million in cash and cash equivalents as of the end of the period, but investors are taking a big chance on this risky stock as SoundHound hasn't proven that it's the real deal, or that it can grow its business without incurring deeper losses along the way.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
