Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. But increasing competition from AI-driven upstarts has tempered enthusiasm, limiting the industry’s gains to 8.3% over the past six months. This return lagged the S&P 500’s 14.1% climb.
Investors should tread carefully as many of these companies are also cyclical, and any misstep can have you catching a falling knife. On that note, here are three services stocks we’re passing on.
Dell (DELL)
Market Cap: $91.11 billion
Founded by Michael Dell in his University of Texas dorm room in 1984 with just $1,000, Dell Technologies (NYSE: DELL) provides hardware, software, and services that help organizations build their IT infrastructure, manage cloud environments, and enable digital transformation.
Why Is DELL Not Exciting?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 3.8% over the last five years was below our standards for the business services sector
- Customers were hesitant to make long-term commitments to its offerings as its 3.6% average ARR growth over the past two years was sluggish
- 6.5 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
At $135.78 per share, Dell trades at 11.4x forward P/E. Dive into our free research report to see why there are better opportunities than DELL.
IBM (IBM)
Market Cap: $282.1 billion
With a corporate history spanning over a century and once known for its iconic mainframe computers, IBM (NYSE: IBM) provides hybrid cloud computing platforms, AI solutions, consulting services, and enterprise infrastructure to help businesses modernize their operations.
Why Does IBM Give Us Pause?
- Annual sales growth of 1.3% over the last five years lagged behind its business services peers as its large revenue base made it difficult to generate incremental demand
- Earnings per share lagged its peers over the last five years as they only grew by 4.2% annually
IBM’s stock price of $302.15 implies a valuation ratio of 25.3x forward P/E. Read our free research report to see why you should think twice about including IBM in your portfolio.
Ingram Micro (INGM)
Market Cap: $5.04 billion
Operating as the crucial link in the global technology supply chain with a presence in 57 countries, Ingram Micro (NYSE: INGM) is a global technology distributor that connects manufacturers with resellers, providing hardware, software, cloud services, and logistics expertise.
Why Are We Hesitant About INGM?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 2.2% over the last five years was below our standards for the business services sector
- Earnings per share fell by 7.8% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Low free cash flow margin of -0.1% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Ingram Micro is trading at $21.41 per share, or 6.7x forward P/E. If you’re considering INGM for your portfolio, see our FREE research report to learn more.
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