Bark’s stock price has taken a beating over the past six months, shedding 49.2% of its value and falling to $0.67 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think Bark Will Underperform?
Even with the cheaper entry price, we're cautious about Bark. Here are three reasons we avoid BARK and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Bark grew its sales at a weak 9.8% compounded annual growth rate. This was below our standard for the consumer discretionary sector.
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 3.1%, meaning it lit $3.11 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 $40.03 million of cash over the last year, and its $82.57 million of debt exceeds the $63.43 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
Bark falls short of our quality standards. Following the recent decline, the stock trades at 27.6× forward EV-to-EBITDA (or $0.67 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.
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