Gartner’s stock price has taken a beating over the past six months, shedding 47.3% of its value and falling to $234.30 per share. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Gartner, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Is Gartner Not Exciting?

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid IT and a stock we'd rather own.

1. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Gartner’s revenue to rise by 2.7%, a slight deceleration versus its 9% annualized growth for the past five years. This projection is underwhelming and suggests its products and services will face some demand challenges.

2. Shrinking Adjusted Operating Margin

Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.

Analyzing the trend in its profitability, Gartner’s adjusted operating margin decreased by 4.4 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 15.6%.

3. Free Cash Flow Margin Dropping

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.

As you can see below, Gartner’s margin dropped by 9.3 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Gartner’s free cash flow margin for the trailing 12 months was 18.8%.

Final Judgment

Gartner isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 17× forward P/E (or $234.30 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d suggest looking at a top digital advertising platform riding the creator economy.

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