While profitability is essential, it doesn’t guarantee long-term success. Some companies that rest on their margins will lose ground as competition intensifies - as Jeff Bezos said, "Your margin is my opportunity".

Not all profitable companies are created equal, and that’s why we built StockStory - to help you find the ones that truly shine bright. Keeping that in mind, here are three profitable companies to steer clear of and a few better alternatives.

Q2 Holdings (QTWO)

Trailing 12-Month GAAP Operating Margin: 2.8%

With a platform powering digital services for approximately 25 million account holders across America, Q2 Holdings (NYSE: QTWO) provides cloud-based digital solutions that help financial institutions, fintechs, and alternative finance companies deliver modern banking experiences to their customers.

Why Do We Think Twice About QTWO?

1. Customers were hesitant to make long-term commitments to its software as its 11.3% average ARR growth over the last year was sluggish
2. Estimated sales growth of 10.7% for the next 12 months implies demand will slow from its two-year trend
3. Gross margin of 53.4% is way below its competitors, leaving less money to invest in areas like marketing and R&D

Q2 Holdings’s stock price of $70.56 implies a valuation ratio of 5.7x forward price-to-sales. Read our free research report to see why you should think twice about including QTWO in your portfolio.

National Vision (EYE)

Trailing 12-Month GAAP Operating Margin: 1.4%

Operating under multiple brands, National Vision (NYSE: EYE) sells optical products such as eyeglasses and provides optical services such as eye exams.

Why Do We Steer Clear of EYE?

1. Products have few die-hard fans as sales have declined by 1.6% annually over the last three years
2. Reduction in its number of stores signals a focus on profitability through targeted consolidation
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its falling returns suggest its earlier profit pools are drying up

At $26.13 per share, National Vision trades at 28.6x forward P/E. Check out our free in-depth research report to learn more about why EYE doesn’t pass our bar.

GEO Group (GEO)

Trailing 12-Month GAAP Operating Margin: 9.5%

With a global footprint spanning three continents and approximately 81,000 beds across 100 facilities, GEO Group (NYSE: GEO) operates secure facilities, processing centers, and reentry services for government agencies in the United States, Australia, and South Africa.

Why Are We Out on GEO?

1. 1.1% annual revenue growth over the last five years was slower than its business services peers
2. Day-to-day expenses have swelled relative to revenue over the last four years as its adjusted operating margin fell by 6.6 percentage points
3. Free cash flow margin shrank by 11.7 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

GEO Group is trading at $16.69 per share, or 13.7x forward P/E. If you’re considering GEO for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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