What a time it’s been for Napco. In the past six months alone, the company’s stock price has increased by a massive 75.3%, reaching $43.15 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Napco, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Napco Not Exciting?

Despite the momentum, we're sitting this one out for now. Here are three reasons there are better opportunities than NSSC and a stock we'd rather own.

1. Lackluster Revenue Growth

Long-term growth is the most important, but within business services, a stretched historical view may miss new innovations or demand cycles. Napco’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 3.4% over the last two years was well below its five-year trend.

2. Fewer Distribution Channels Limit its Ceiling

With $181.6 million in revenue over the past 12 months, Napco is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

3. Projected Revenue Growth Is Slim

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 Napco’s revenue to rise by 3.1%, close to its 12.4% annualized growth for the past five years. This projection doesn't excite us and implies its newer products and services will not lead to better top-line performance yet.

Final Judgment

Napco isn’t a terrible business, but it isn’t one of our picks. After the recent rally, the stock trades at 36.3× forward P/E (or $43.15 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.

Stocks We Would Buy Instead of Napco

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