Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. But increasing competition from AI-driven upstarts has tempered enthusiasm, limiting the industry’s gains to 8.3% over the past six months. This return lagged the S&P 500’s 14.1% climb.

Investors should tread carefully as many of these companies are also cyclical, and any misstep can have you catching a falling knife. On that note, here are three services stocks we’re passing on.

Dell (DELL)

Market Cap: $91.11 billion

Founded by Michael Dell in his University of Texas dorm room in 1984 with just $1,000, Dell Technologies (NYSE: DELL) provides hardware, software, and services that help organizations build their IT infrastructure, manage cloud environments, and enable digital transformation.

Why Is DELL Not Exciting?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 3.8% over the last five years was below our standards for the business services sector
2. Customers were hesitant to make long-term commitments to its offerings as its 3.6% average ARR growth over the past two years was sluggish
3. 6.5 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

At $135.78 per share, Dell trades at 11.4x forward P/E. Dive into our free research report to see why there are better opportunities than DELL.

IBM (IBM)

Market Cap: $282.1 billion

With a corporate history spanning over a century and once known for its iconic mainframe computers, IBM (NYSE: IBM) provides hybrid cloud computing platforms, AI solutions, consulting services, and enterprise infrastructure to help businesses modernize their operations.

Why Does IBM Give Us Pause?

1. Annual sales growth of 1.3% over the last five years lagged behind its business services peers as its large revenue base made it difficult to generate incremental demand
2. Earnings per share lagged its peers over the last five years as they only grew by 4.2% annually

IBM’s stock price of $302.15 implies a valuation ratio of 25.3x forward P/E. Read our free research report to see why you should think twice about including IBM in your portfolio.

Ingram Micro (INGM)

Market Cap: $5.04 billion

Operating as the crucial link in the global technology supply chain with a presence in 57 countries, Ingram Micro (NYSE: INGM) is a global technology distributor that connects manufacturers with resellers, providing hardware, software, cloud services, and logistics expertise.

Why Are We Hesitant About INGM?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 2.2% over the last five years was below our standards for the business services sector
2. Earnings per share fell by 7.8% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
3. Low free cash flow margin of -0.1% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

Ingram Micro is trading at $21.41 per share, or 6.7x forward P/E. If you’re considering INGM for your portfolio, see our FREE research report to learn more.

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