Shareholders of Bark would probably like to forget the past six months even happened. The stock dropped 37.8% and now trades at $0.86. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Bark, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Bark Will Underperform?
Even though the stock has become cheaper, we're swiping left on Bark for now. Here are three reasons why BARK doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Bark grew its sales at a 13.6% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Breakeven Free Cash Flow Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Bark broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Bark burned through $19.13 million of cash over the last year. With $84.67 million of cash on its balance sheet, the company has around 53 months of runway left (assuming its $83.89 million of debt isn’t due right away).
Unless the Bark’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Bark until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies helping consumers, but in the case of Bark, we’re out. After the recent drawdown, the stock trades at 125.3× forward EV-to-EBITDA (or $0.86 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of our all-time favorite software stocks.
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