5 Cash Burn Stocks Face More Declines Ahead

Shares of five high-profile cash-consuming companies have plunged this year as investors become increasingly risk-averse and skeptical about the ability of these firms to post sustained profits or free cash flow in the future, a column in Barron's observes. More declines may be ahead.

These companies are Peleton Interactive Inc. (PTON), Tesla Inc. (TSLA), Gamestop Corp. (GME), Uber Technologies Inc. (UBER), and Netflix Inc. (NFLX). Exercise bike maker Peleton went public at $29 on Sept. 26, 2019, and closed that day down by 11%. As of the close on Oct. 3, the cumulative loss was 23%.

The IPO of ride hailing service Uber was priced at $45 in May, and had fallen by 34% as of the close on Oct. 3. Shares of electric car maker Tesla, video game retailer Gamestop, and video streaming service Netflix are down by 39%, 68%, and 31% from their respective 52-week highs.

Significance for Investors

Peleton and Uber are among the growing list of unprofitable companies going public, evoking worrisome parallels with the dotcom bubble, per a detailed report in Bloomberg. Goldman Sachs recently analyzed more than 4,000 IPOs over 25 years and found that failure to become profitable within three years of going public typically pointed to yet more losses ahead, the Barron's column indicates.

Peleton's 11% share price drop in its first day of trading was the second-worst debut of any IPO that raised at least $500 million so far in 2019, according to Dealogic data cited by The Wall Street Journal. In the fiscal year that ended in June, its revenues more than doubled from the prior year, but its net loss more than quadrupled.

Netflix went public in 2002, but is on track to consume $3.4 billion of cash in 2019 and $2.5 billion in 2020, for a cumulative cash burn of $12 billion over 5 years, and now is not expected to produce positive free cash flow until 2022, a year later than previously estimated by analysts, the Barron's column notes. Increasing competition from Amazon.com Inc. (AMZN), Apple Inc. (AAPL), and The Walt Disney Co. (DIS), among others, is spurring Netflix to spend yet more billions on new original content, but with no guarantee that these dollars will produce hits, the Financial Times observes.

Tesla went public in 2010 and has burned through $10.9 billion in the last 12 years, compared to roughly $1 billion for four leading tech stocks combined in their early years, Fortune calculates. Apple never burned cash when new, and for only short periods after it matured. Google parent Alphabet Inc. (GOOGL) never seems to have burned much, if any, cash, while Facebook Inc. (FB) had just two years of negative free cash flow, 2007 and 2008, adding to a mere $143 million. Amazon, meanwhile, has been a cash generator since 2002, and its total free cash flow deficit was just $824 million in prior years. One might argue, however, that these comparisons are imperfect, given the high capital costs of automotive manufacturing.

Gamestop is producing free cash, but on a downtrend. As a brick-and-mortar seller of physical video game disks, a retail segment in especially severe decline, its future is especially cloudy.

Looking Ahead

“These types of names go completely out of favor in a recessionary environment," as Jeffrey Osborne, an analyst with Cowen, told Bloomberg. It seems as if, for some of these money-losing companies, that day may have come earlier.