Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. Furthermore, the demand for their offerings is rising as more clients outsource non-core functions, a trend that has enabled the industry to return 14.3% over the past six months, almost identical to the S&P 500.
Nevertheless, investors should tread carefully as many companies in this space are cyclical due to their reliance on corporate spending budgets. Taking that into account, here is one resilient services stock at the top of our wish list and two best left ignored.
Two Business Services Stocks to Sell:
Vestis (VSTS)
Market Cap: $553.7 million
Operating a network of more than 350 facilities with 3,300 delivery routes serving customers weekly, Vestis (NYSE: VSTS) provides uniform rentals, workplace supplies, and facility services to over 300,000 business locations across the United States and Canada.
Why Are We Out on VSTS?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.5% annually over the last two years
- Capital intensity has ramped up over the last four years as its free cash flow margin decreased by 9.8 percentage points
- 5× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $4.23 per share, Vestis trades at 12.1x forward P/E. If you’re considering VSTS for your portfolio, see our FREE research report to learn more.
Grid Dynamics (GDYN)
Market Cap: $677.4 million
With engineering centers across the Americas, Europe, and India serving Fortune 1000 companies, Grid Dynamics (NASDAQ: GDYN) provides technology consulting, engineering, and analytics services to help large enterprises modernize their technology systems and business processes.
Why Does GDYN Give Us Pause?
- Subscale operations are evident in its revenue base of $389.2 million, meaning it has fewer distribution channels than its larger rivals
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 3.3% annually while its revenue grew
- Negative returns on capital show that some of its growth strategies have backfired
Grid Dynamics is trading at $8.05 per share, or 17.9x forward P/E. Read our free research report to see why you should think twice about including GDYN in your portfolio.
One Business Services Stock to Buy:
Super Micro (SMCI)
Market Cap: $27.48 billion
Founded in Silicon Valley in 1993 and known for its modular "building block" approach to server design, Super Micro Computer (NASDAQ: SMCI) designs and manufactures high-performance, energy-efficient server and storage systems for data centers, cloud computing, AI, and edge computing applications.
Why Will SMCI Outperform?
- Annual revenue growth of 75.6% over the last two years was superb and indicates its market share increased during this cycle
- Enormous revenue base of $21.97 billion provides significant distribution advantages
- Free cash flow margin is now positive, indicating the company has achieved financial self-sustainability
Super Micro’s stock price of $45.97 implies a valuation ratio of 16.6x forward P/E. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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