Companies with more cash than debt can be financially resilient, but that doesn’t mean they’re all strong investments. Some lack leverage because they struggle to grow or generate consistent profits, making them unattractive borrowers.
Not all businesses with cash are winners, and that’s why we built StockStory - to help you separate the good from the bad. Keeping that in mind, here are three companies with net cash positions to avoid and some better alternatives instead.
PubMatic (PUBM)
Net Cash Position: $91.96 million (22.3% of Market Cap)
Powering billions of daily ad impressions across the open internet, PubMatic (NASDAQ: PUBM) operates a technology platform that helps publishers maximize revenue from their digital advertising inventory while giving advertisers more control and transparency.
Why Do We Think PUBM Will Underperform?
- Net revenue retention rate of 107% trails the industry benchmark of 110%+ and shows it has a tough time increasing customer spending
- Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue
- Free cash flow margin is forecasted to shrink by 8.4 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
At $8.99 per share, PubMatic trades at 1.5x forward price-to-sales. To fully understand why you should be careful with PUBM, check out our full research report (it’s free for active Edge members).
Yum China (YUMC)
Net Cash Position: $302 million (1.8% of Market Cap)
One of China’s largest restaurant companies, Yum China (NYSE: YUMC) is an independent entity spun off from Yum! Brands in 2016.
Why Are We Hesitant About YUMC?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new diners into its restaurants
- Estimated sales growth of 4.5% for the next 12 months is soft and implies weaker demand
- Challenging supply chain dynamics and bad unit economics are reflected in its low gross margin of 20.1%
Yum China’s stock price of $47.74 implies a valuation ratio of 17x forward P/E. Read our free research report to see why you should think twice about including YUMC in your portfolio.
Matrix Service (MTRX)
Net Cash Position: $196.9 million (59.9% of Market Cap)
Founded in Oklahoma, Matrix Service (NASDAQ: MTRX) provides engineering, fabrication, construction, and maintenance services primarily to the energy and industrial markets.
Why Does MTRX Fall Short?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.9% annually over the last five years
- High input costs result in an inferior gross margin of 3.8% that must be offset through higher volumes
- Performance over the past five years was negatively impacted by new share issuances as its earnings per share dropped by 66.3% annually, worse than its revenue
Matrix Service is trading at $11.84 per share, or 22.1x forward P/E. Dive into our free research report to see why there are better opportunities than MTRX.
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