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 10.6% over the past six months. This drawdown was worse than the S&P 500’s 2.4% fall.
A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. With that said, here are three services stocks we’re steering clear of.
Driven Brands (DRVN)
Market Cap: $2.90 billion
With approximately 5,000 locations across 49 U.S. states and 13 other countries, Driven Brands (NASDAQ: DRVN) operates a network of automotive service centers offering maintenance, car washes, paint, collision repair, and glass services across North America.
Why Does DRVN Fall Short?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $16.78 per share, Driven Brands trades at 13.7x forward P/E. Read our free research report to see why you should think twice about including DRVN in your portfolio.
Xerox (XRX)
Market Cap: $644 million
Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ: XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.
Why Is XRX Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 6.7% annually over the last five years
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
- High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Xerox’s stock price of $4.67 implies a valuation ratio of 5.2x forward P/E. Dive into our free research report to see why there are better opportunities than XRX.
Ziff Davis (ZD)
Market Cap: $1.3 billion
Originally a pioneering technology publisher founded in 1927 that became famous for PC Magazine, Ziff Davis (NASDAQ: ZD) operates a portfolio of digital media brands and subscription services across technology, shopping, gaming, healthcare, and cybersecurity markets.
Why Should You Dump ZD?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Earnings per share fell by 1.6% annually over the last five years while its revenue was flat, showing each sale was less profitable
- 17.6 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
Ziff Davis is trading at $32 per share, or 4.3x forward P/E. Check out our free in-depth research report to learn more about why ZD doesn’t pass our bar.
Stocks We Like More
Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.
While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 176% over the last five years.
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today for free.
