Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. But increasing competition from AI-driven upstarts has tempered enthusiasm, and over the past six months, the industry has pulled back by 2.2%. This performance was disheartening since the S&P 500 gained 5.4%.
Investors should tread carefully as many of these companies are also cyclical, and any misstep can have you catching a falling knife. Taking that into account, here are three services stocks that may face trouble.
Avnet (AVT)
Market Cap: $4.49 billion
With a century-long history of adapting to technological evolution, Avnet (NASDAQ: AVT) is a global electronic components distributor that connects manufacturers of semiconductors and other electronic parts with businesses that need these components.
Why Does AVT Fall Short?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 8.3% annually over the last two years
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.1% for the last five years
Avnet’s stock price of $53.50 implies a valuation ratio of 10.5x forward P/E. Check out our free in-depth research report to learn more about why AVT doesn’t pass our bar.
Insight Enterprises (NSIT)
Market Cap: $4.57 billion
With over 35 years of IT expertise and partnerships with more than 8,000 technology providers, Insight Enterprises (NASDAQ: NSIT) provides end-to-end digital transformation solutions that help businesses modernize their IT infrastructure and maximize the value of technology.
Why Do We Steer Clear of NSIT?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 8.7% annually over the last two years
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 1.6% annually
- Low free cash flow margin of 3.5% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
At $145.82 per share, Insight Enterprises trades at 14.6x forward P/E. If you’re considering NSIT for your portfolio, see our FREE research report to learn more.
NV5 Global (NVEE)
Market Cap: $1.52 billion
Operating from over 100 locations across the U.S. and internationally, NV5 Global (NASDAQ: NVEE) provides engineering, environmental, geospatial, and technical consulting services to public and private sector clients for infrastructure and building projects.
Why Are We Hesitant About NVEE?
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 5.1 percentage points
- Earnings per share fell by 2.8% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Free cash flow margin shrank by 13.7 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
NV5 Global is trading at $23.34 per share, or 17.4x forward P/E. Read our free research report to see why you should think twice about including NVEE in your portfolio.
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