Growth stocks can be great long-term investments to hold on to. But they can be problematic for investors if companies burn through tons of cash, as it can cause them to go into debt or issue more stock just to keep the lights on. And neither scenario is attractive to investors.
A few stocks that are on a difficult path right now that I would stay away from are Ocugene (NASDAQ:OCGN) and ContextLogic (NASDAQ: WISH). Both of these companies are burning millions of dollars and may need more money in the not too distant future.
Ocugen is a risky stock for many reasons. First, investors are hanging their hats on the hope that its COVID-19 vaccine could generate significant revenue for the company and make it wealthy in turn. But it’s still unclear whether the vaccine Ocugen is co-developing with Indian healthcare company Bharat Biotech will gain approval in the US or Canadian markets – the only ones where Ocugen will have a share of the profits.
The other risk is that in the meantime, while investors wait for news, the company itself fails to generate money as its losses continue to pile up. For the nine-month period ending September 30, 2021, the company’s net losses totaled $43.8 million. The impact on cash flow is even more worrying.
During the same period, Ocugen used $35.1 million for day-to-day operations alone. This is problematic given that the money Ocugen brought in at the end of the period was only $107.5 million. And that cash burn doesn’t factor in other expenses like acquisitions, which can only exacerbate the problem.
Ocugen is a risky stock that has fallen 45% in the past six months, while the S&P500 remained relatively stable, increasing by 4%. While this may be a cheaper stock to buy than it was at the time, that alone isn’t enough to make Ocugen a buy. It is not excluded that heavier losses are to come.
2. Contextual logic
ContextLogic operates the popular e-commerce site Wish.com. But with so many similar websites for consumers to choose from and supply chain issues plaguing the industry, it hasn’t been an easy road for the company lately. In its last nine months, ContextLogic recorded sales of $1.8 billion, up just 3% from the same period last year. And during that time, his net loss went from $176 million to $303 million.
As with Ocugen, the biggest risk is cash burn. In nine months, ContextLogic used $902 million from its operations. A year ago, this figure was positive at $24 million. With approximately $1.1 billion in cash on its books, ContextLogic could potentially run out of cash within a year if it were to maintain that level of cash burn and not seek to raise additional funds.
In six months, the performance of the action has been catastrophic: its price has fallen by 75%. Another e-commerce platform, Shopify, also struggled, but even its 40% losses pale in comparison. Despite the stock’s losses, I would still say that Shopify is one of the best growth stocks to buy right now. Its business not only generates positive cash from operations, but it has also had consistently positive free cash flow over the past 12 months. ContextLogic is not in such a solid boat.
Nor did ContextLogic promise any short-term turnaround. For the fourth quarter (ending Dec. 31, 2021), the company expects its sales to be lower than third-quarter revenue, which totaled $368 million. Its CEO has also resigned, which opens an uncertain path for the company.
There’s no shortage of red flags surrounding ContextLogic at the moment, and it’s an investment that may only be suitable for contrarian investors who are willing to take significant risk.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.