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 certainly contributed to services stocks’ recent underperformance - over the past six months, the industry’s 2.3% gain has fallen behind the S&P 500’s 9.9% rise.
Investors should tread carefully as many of these companies are also cyclical, and any misstep can have you catching a falling knife. Keeping that in mind, here are three services stocks we’re passing on.
Array (AD)
Market Cap: $4.63 billion
Operating as a majority-owned subsidiary of Telephone and Data Systems since its founding in 1983, Array (NYSE: Array) is a regional wireless telecommunications provider serving 4.6 million customers across 21 states with mobile phone, internet, and IoT services.
Why Should You Dump AD?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 6.8% annually over the last five years
- Earnings per share have dipped by 42.7% annually over the past five years, which is concerning because stock prices follow EPS over the long term
- Underwhelming 0.7% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
At $53.62 per share, Array trades at 26.3x forward EV-to-EBITDA. If you’re considering AD for your portfolio, see our FREE research report to learn more.
Applied Digital (APLD)
Market Cap: $7.00 billion
Pivoting from its origins in cryptocurrency mining to become a key player in the AI infrastructure boom, Applied Digital (NASDAQ: APLD) designs and operates specialized data centers that provide high-performance computing infrastructure for artificial intelligence and blockchain applications.
Why Do We Think Twice About APLD?
- Earnings per share fell by 83.8% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 54.3 percentage points
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Applied Digital’s stock price of $24.80 implies a valuation ratio of 67.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including APLD in your portfolio.
ePlus (PLUS)
Market Cap: $2.30 billion
Starting as a financing company in 1990 before evolving into a full-service technology provider, ePlus (NASDAQ: PLUS) provides comprehensive IT solutions, professional services, and financing options to help organizations optimize their technology infrastructure and supply chain processes.
Why Does PLUS Give Us Pause?
- Sales were flat over the last two years, indicating it’s failed to expand this cycle
- Sales are projected to tank by 2.1% over the next 12 months as demand evaporates further
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
ePlus is trading at $87.70 per share, or 19.9x forward P/E. Check out our free in-depth research report to learn more about why PLUS doesn’t pass our bar.
Stocks We Like More
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