In This Article:
Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. Still, investors are uneasy as firms face challenges from AI-driven disruptors and tightening corporate budgets. These doubts have caused the industry to lag recently as services stocks have collectively shed 6.7% over the past six months. This drop was worse than the S&P 500’s 2.4% decline.
A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. On that note, here are three services stocks we’re passing on.
Arlo Technologies (ARLO)
Market Cap: $1.38 billion
Originally spun off from networking equipment maker Netgear in 2018, Arlo Technologies (NYSE:ARLO) provides cloud-based smart security devices and subscription services that help consumers and businesses monitor and protect their homes, properties, and loved ones.
Why Are We Cautious About ARLO?
-
Sales trends were unexciting over the last two years as its 3% annual growth was below the typical business services company
-
Revenue base of $505.8 million indicates it’s still subscale compared to its larger peers (though this creates opportunities to expand into untapped markets)
-
Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.6% for the last five years
At $12.92 per share, Arlo Technologies trades at 20.8x forward P/E. If you’re considering ARLO for your portfolio, see our FREE research report to learn more.
Interface (TILE)
Market Cap: $1.23 billion
Pioneering carbon-neutral flooring since its founding in 1973, Interface (NASDAQ:TILE) is a global manufacturer of modular carpet tiles, luxury vinyl tile (LVT), and rubber flooring that specializes in carbon-neutral and sustainable flooring solutions.
Why Do We Avoid TILE?
-
Sales were flat over the last five years, indicating it’s failed to expand this cycle
-
Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 16.7% annually
-
ROIC of 10.3% reflects management’s challenges in identifying attractive investment opportunities
Interface is trading at $22 per share, or 7.6x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than TILE.
Korn Ferry (KFY)
Market Cap: $3.51 billion
With clients including 97% of the S&P 100 and operations in 103 offices across 51 countries, Korn Ferry (NYSE:KFY) is a global consulting firm that helps organizations design optimal structures, recruit talent, develop leaders, and create effective compensation strategies.