Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. But increasing competition from AI-driven upstarts has tempered enthusiasm, and over the past six months, the industry has pulled back by 1.4%. This performance was similar to the S&P 500’s.
A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. Keeping that in mind, here are three services stocks that may face trouble.
Arlo Technologies (ARLO)
Market Cap: $1.08 billion
Originally spun off from networking equipment maker Netgear in 2018, Arlo Technologies (NYSE: ARLO) provides cloud-based smart security devices and subscription services that help consumers and businesses monitor and protect their homes, properties, and loved ones.
Why Are We Cautious About ARLO?
- Annual revenue growth of 2.1% over the last two years was below our standards for the business services sector
- Modest revenue base of $510.9 million gives it less fixed cost leverage and fewer distribution channels than larger companies
- Cash burn makes us question whether it can achieve sustainable long-term growth
Arlo Technologies’s stock price of $10.17 implies a valuation ratio of 19.8x forward price-to-earnings. Read our free research report to see why you should think twice about including ARLO in your portfolio.
Pitney Bowes (PBI)
Market Cap: $1.71 billion
With a century-long history dating back to 1920 and processing over 15 billion pieces of mail annually, Pitney Bowes (NYSE: PBI) provides shipping, mailing technology, logistics, and financial services to businesses of all sizes.
Why Should You Sell PBI?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 8.9% annually over the last five years
- Sales are projected to tank by 24.6% over the next 12 months as its demand continues evaporating
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
If you’re considering PBI for your portfolio, see our FREE research report to learn more.
CSG (CSGS)
Market Cap: $1.64 billion
Powering billions of critical customer interactions annually, CSG Systems (NASDAQ: CSGS) provides cloud-based software platforms that help companies manage customer interactions, process payments, and monetize their services.
Why Do We Think CSGS Will Underperform?
- 4.8% annual revenue growth over the last two years was slower than its business services peers
- Estimated sales decline of 1.6% for the next 12 months implies a challenging demand environment
- Free cash flow margin shrank by 5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $59.81 per share, CSG trades at 13.3x forward price-to-earnings. Check out our free in-depth research report to learn more about why CSGS doesn’t pass our bar.
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