Amdocs currently trades at $90.69 per share and has shown little upside over the past six months, posting a middling return of 4%. However, the stock is beating the S&P 500’s 3.3% decline during that period.
Is now the time to buy Amdocs, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Amdocs Will Underperform?
Despite the relative momentum, we're swiping left on Amdocs for now. Here are three reasons why we avoid DOX and a stock we'd rather own.
1. Weak Backlog Growth Points to Soft Demand
In addition to reported revenue, backlog is a useful data point for analyzing Enterprise Networking companies. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Amdocs’s future revenue streams.
Amdocs’s backlog came in at $4.17 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 1.6%. This performance was underwhelming and suggests that increasing competition is causing challenges in winning new orders. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Amdocs’s revenue to drop by 3.5%, a decrease from its flat sales for the past two years. This projection doesn't excite us and suggests its products and services will face some demand challenges.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Amdocs’s margin dropped by 4.6 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Amdocs’s free cash flow margin for the trailing 12 months was 12.7%.
Final Judgment
Amdocs falls short of our quality standards. Following its recent outperformance amid a softer market environment, the stock trades at 12.5× forward P/E (or $90.69 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.
Stocks We Like More Than Amdocs
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