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, limiting the industry’s gains to 3.7% over the past six months. This return lagged the S&P 500’s 8% climb.
Investors should tread carefully as many of these companies are also cyclical, and any misstep can have you catching a falling knife. Keeping that in mind, here are three services stocks we’re swiping left on.
Liberty Broadband (LBRDK)
Market Cap: $8.99 billion
Operating across the United States, Liberty Broadband (NASDAQ: LBRDK) is a provider of high-speed internet, cable television, and telecommunications services across various markets.
Why Do We Think Twice About LBRDK?
- Annual revenue growth of 3.1% over the last two years was below our standards for the business services sector
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $61.31 per share, Liberty Broadband trades at 50.9x forward EV-to-EBITDA. To fully understand why you should be careful with LBRDK, check out our full research report (it’s free).
Diebold Nixdorf (DBD)
Market Cap: $2.30 billion
With roots dating back to 1859 and a presence in over 100 countries, Diebold Nixdorf (NYSE: DBD) provides automated self-service technology, software, and services that help banks and retailers digitize their customer transactions.
Why Are We Wary of DBD?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.8% annually over the last five years
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Low returns on capital reflect management’s struggle to allocate funds effectively
Diebold Nixdorf’s stock price of $62.74 implies a valuation ratio of 14.4x forward P/E. Read our free research report to see why you should think twice about including DBD in your portfolio.
ScanSource (SCSC)
Market Cap: $970.2 million
Operating as a crucial link in the technology supply chain since 1992, ScanSource (NASDAQ: SCSC) is a hybrid distributor that connects hardware, software, and cloud services from technology suppliers to resellers and business customers.
Why Do We Think SCSC Will Underperform?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 11.4% annually over the last two years
- Earnings per share have contracted by 3.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Underwhelming 8.1% return on capital reflects management’s difficulties in finding profitable growth opportunities
ScanSource is trading at $44.56 per share, or 11.7x forward P/E. Dive into our free research report to see why there are better opportunities than SCSC.
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