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Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. 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 2.4% over the past six months. This drawdown was disheartening since the S&P 500 stood firm.
While some companies have durable competitive advantages that enable them to grow in any landscape, the odds aren’t great for the ones we’re analyzing today. On that note, here are three services stocks we’re steering clear of.
Plexus (PLXS)
Market Cap: $3.59 billion
With over 20,000 team members across 26 global facilities, Plexus (NASDAQ:PLXS) designs, manufactures, and services complex electronic products for companies in aerospace/defense, healthcare, and industrial sectors.
Why Are We Hesitant About PLXS?
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Sales tumbled by 3.6% annually over the last two years, showing market trends are working against its favor during this cycle
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Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 1.7% annually
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Poor free cash flow margin of 2.9% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Plexus’s stock price of $132.70 implies a valuation ratio of 18.2x forward P/E. Read our free research report to see why you should think twice about including PLXS in your portfolio, it’s free.
SAIC (SAIC)
Market Cap: $5.75 billion
With over five decades of experience supporting national security missions, Science Applications International Corporation (NASDAQ:SAIC) provides technical, engineering, and enterprise IT services primarily to U.S. government agencies and military branches.
Why Do We Think SAIC Will Underperform?
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Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.5% annually over the last two years
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Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.7%
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Low returns on capital reflect management’s struggle to allocate funds effectively
SAIC is trading at $121.92 per share, or 13.4x forward P/E. Dive into our free research report to see why there are better opportunities than SAIC.
WEBTOON (WBTN)
Market Cap: $1.16 billion
Pioneering a vertical-scrolling format optimized for mobile devices, WEBTOON Entertainment (NASDAQ:WBTN) operates a global platform where creators publish serialized web-comics and web-novels that users can read in bite-sized episodes.