Troubled retailer Bed Bath & Beyond (BBBY) has become the latest meme stock to see incredibly volatile price action, including a 300% short squeeze in the past month. Investors sometimes pile into meme stocks for a potential quick profit -- speculative behavior closer to gambling than anything.
But I'll show you why investors shouldn't touch the stock with a 10-foot pole and highlight an alternative -- an advertising technology, or adtech, industry leader that could provide superior long-term returns without nearly as much risk. Roll your sleeves up, and let's dive in.
Don't buy this: Bed Bath & Beyond
Bed Bath & Beyond is a distressed retail business desperate to fight off bankruptcy. You can see below how ugly the company's financial picture has become, including $1.3 billion in long-term debt and a cash balance that's nearly dry after burning through $722 million in cash over the past year.
Data by YCharts.
The company recently announced coming changes, including downsizing by unloading a third of its owned brands, closing 150 stores, and cutting 20% of its workforce. Bed Bath & Beyond also secured $500 million in new financing that will be used for operations and paying down debt. Lastly, management filed for an equity offering of up to 12 million shares to raise additional money.
A business facing bankruptcy is in survival mode. Cutting costs and raising capital will buy more time, but there is no evidence right now the company will recover over the long term. Additionally, an extra 12 million shares would increase the number of outstanding shares by 15%, significantly diluting existing shareholders (making their shares worth a smaller piece of the business).
Investors can make money landing on the right side of a short squeeze, but meme stocks are very speculative and often don't pan out over the long term. If you roll the dice on a stock like Bed Bath & Beyond, know the risks.
Buy this instead: Roku
Investors can find solid, growing businesses in this bear market. The streaming platform Roku (ROKU 5.41%) is a great example. Roku sells streaming hardware, including dongles and streaming sticks, while also partnering with smart TV manufacturers to put its operating software into TVs. Roku had 63.1 million active users as of the second quarter.
The company's financials are much healthier than Bed Bath & Beyond's. Roku is steadily growing its revenue, has $2 billion in cash against almost no debt on the balance sheet, and is burning minimal cash.
Data by YCharts. TTM = trailing twelve months.
Importantly, Roku's path forward is clear: People are moving away from traditional cable and pay-TV services to streaming, and Roku controls roughly 50% of the connected-TV market in North America. It's expanding internationally to Latin America and Europe, and it has a growing adtech business. Like many other advertising companies, short-term economic uncertainty has slowed Roku's business, but the long-term picture still looks bright.
The stock has fallen a whopping 86% from its high, but Roku continues picking up users, adding 1.8 million active accounts between first and second quarters of 2022. The company's substantial market share and expanding user base form a solid foundation for revenue growth as the economy improves. Until then, Roku's stock trades at a price-to-sales ratio (P/S) of three, just about its lowest level since the company went public in 2017. That means more upside for less risk than what a meme stock like Bed Bath & Beyond offers.
