Growth stocks can be great long-term investments to hang on to. But they can be problematic for investors if the companies are burning through tons of cash, as that can result in them taking on debt or issuing more shares just to keep the lights on. And neither scenario is attractive for investors.
A couple of stocks that are on a challenging path right now that I would stay away from are Ocugen (OCGN -1.16%) and ContextLogic (WISH -1.65%). Both of these companies are burning through millions of dollars and could need more money in the not too distant future.
Image source: Getty Images.
1. Ocugen
Ocugen is a risky stock for many reasons. First, investors are hanging their hats on the hopes that its COVID-19 vaccine could lead to significant revenue for the business and make them rich in turn. But there's still no word on whether the vaccine Ocugen is co-developing with Indian healthcare company Bharat Biotech will obtain approval in the U.S. or Canadian markets -- the only ones where Ocugen will have a share in the profits.
The other risk is that in the meantime, while investors wait for news, the business itself isn't generating any money while its losses continue to pile on. For the nine-month period ending Sept. 30, 2021, the company's net losses totaled $43.8 million. Even more concerning is the impact on cash.
Over the same time frame, Ocugen has used up $35.1 million on just its day-to-day operating activities. That's problematic given that the cash Ocugen reported at the end of the period was just $107.5 million. And that cash burn doesn't factor in any other expenses like acquisitions, which may only exacerbate the issue.
Ocugen is a risky stock that has fallen 45% in the past six months while the S&P 500 has remained relatively steady, rising by 4%. Although it may be a cheaper stock to buy than it was back then, that alone doesn't make Ocugen a buy. It's not out of the question that heavier losses could be on the way.
2. ContextLogic
ContextLogic operates the popular e-commerce site Wish.com. But with so many similar websites out there for consumers to choose from and supply chain issues weighing on the industry, it hasn't been an easy path for the business of late. Over its past nine months, ContextLogic reported sales of $1.8 billion, which were up just 3% from the same period last year. And during that time its net loss swelled from $176 million to $303 million.
As with Ocugen, the greater risk lies with cash burn. In nine months, ContextLogic has used up $902 million from its operating activities. A year ago, that figure was a positive $24 million. With around $1.1 billion of cash on its books, ContextLogic could conceivably run out of money within a year if it were to maintain this level of cash burn and not look to raise additional funds.
In six months, the stock's performance has been catastrophic -- its share price has fallen a whopping 75%. Another e-commerce platform, Shopify, has also struggled, but even its losses of 40% pale in comparison. Despite the stock's losses, I'd still argue that Shopify is one of the best growth stocks to buy right now. Its business not only generates positive operating cash, but it has also reported consistently positive free cash flow over the trailing 12 months. ContextLogic isn't in as solid a boat.
ContextLogic hasn't promised any near-term turnaround, either. For the fourth quarter (ending Dec. 31, 2021), the company anticipates its sales will come in lower than revenue for the third quarter, which totaled $368 million. Its CEO has also resigned, making for an uncertain path forward for the business.
There are no shortage of red flags around ContextLogic right now, and this is an investment that can only be suitable for contrarian investors who are willing to take on significant risk.
