What a brutal six months it’s been for Bark. The stock has dropped 36.9% and now trades at $9.72, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in Bark, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Bark Will Underperform?
Even though the stock has become cheaper, we’re cautious about Bark. Here are three reasons you should be careful with BARK, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of 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’s demand was weak and its revenue declined by 2.5% per year. This wasn’t a great result and signals it’s a low quality business.
2. Cash Burn Ignites Concerns
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.
Over the last two years, Bark’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 5.1%, meaning it lit $5.13 of cash on fire for every $100 in revenue.
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 $24.08 million of cash over the last year, and its $36.23 million of debt exceeds the $16.09 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
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 cheer for all companies serving everyday consumers, but in the case of Bark, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 11.4× forward EV-to-EBITDA (or $9.72 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Bark
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