Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. Furthermore, the demand for their offerings is rising as more clients outsource non-core functions, a trend that has enabled the industry to return 33% over the past six months. At the same time, the S&P 500 was up 29.3%.
Although these companies have produced results, only a handful will thrive over the long term as AI-driven upstarts are rapidly taking share from the incumbents. On that note, here are three services stocks we’re steering clear of.
HP (HPQ)
Market Cap: $25.58 billion
Born from the legendary Silicon Valley garage startup founded by Bill Hewlett and Dave Packard in 1939, HP (NYSE: HPQ) designs and sells personal computers, printers, and related technology products and services to consumers, businesses, and enterprises worldwide.
Why Should You Dump HPQ?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Estimated sales growth of 2% for the next 12 months is soft and implies weaker demand
- Earnings per share fell by 2% annually over the last two years while its revenue was flat, showing each sale was less profitable
HP is trading at $27.50 per share, or 8.2x forward P/E. Dive into our free research report to see why there are better opportunities than HPQ.
IAC (IAC)
Market Cap: $2.62 billion
Originally known as InterActiveCorp and built through Barry Diller's strategic acquisitions since the 1990s, IAC (NASDAQ: IAC) operates a portfolio of category-leading digital businesses including Dotdash Meredith, Angi, and Care.com, focusing on digital publishing, home services, and caregiving platforms.
Why Is IAC Risky?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 20.4% annually over the last two years
- Earnings per share have contracted by 41.3% annually over the last four years, a headwind for returns as stock prices often echo long-term EPS performance
- Negative returns on capital show management lost money while trying to expand the business
At $32.80 per share, IAC trades at 23.9x forward P/E. To fully understand why you should be careful with IAC, check out our full research report (it’s free for active Edge members).
NetApp (NTAP)
Market Cap: $23.77 billion
Founded in 1992 as a pioneer in networked storage technology, NetApp (NASDAQ: NTAP) provides data storage and management solutions that help organizations store, protect, and optimize their data across on-premises data centers and public clouds.
Why Does NTAP Worry Us?
- Sales trends were unexciting over the last two years as its 3.1% annual growth was below the typical business services company
- Anticipated sales growth of 3.9% for the next year implies demand will be shaky
NetApp’s stock price of $119.84 implies a valuation ratio of 14.8x forward P/E. Read our free research report to see why you should think twice about including NTAP in your portfolio.
Stocks We Like More
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