3 Services Stocks That Concern Us

Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. But increasing competition from AI-driven upstarts has tempered enthusiasm, limiting the industry’s gains to 3.7% over the past six months. This return lagged the S&P 500’s 8% climb.

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 swiping left on.

Liberty Broadband (LBRDK)

Market Cap: $8.99 billion

Operating across the United States, Liberty Broadband (NASDAQ:LBRDK) is a provider of high-speed internet, cable television, and telecommunications services across various markets.

Why Do We Think Twice About LBRDK?

1. Annual revenue growth of 3.1% over the last two years was below our standards for the business services sector
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

At $61.31 per share, Liberty Broadband trades at 50.9x forward EV-to-EBITDA. To fully understand why you should be careful with LBRDK, check out our full research report (it’s free).

Diebold Nixdorf (DBD)

Market Cap: $2.30 billion

With roots dating back to 1859 and a presence in over 100 countries, Diebold Nixdorf (NYSE:DBD) provides automated self-service technology, software, and services that help banks and retailers digitize their customer transactions.

Why Are We Wary of DBD?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.8% annually over the last five years
2. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Diebold Nixdorf’s stock price of $62.74 implies a valuation ratio of 14.4x forward P/E. Read our free research report to see why you should think twice about including DBD in your portfolio.

ScanSource (SCSC)

Market Cap: $970.2 million

Operating as a crucial link in the technology supply chain since 1992, ScanSource (NASDAQ:SCSC) is a hybrid distributor that connects hardware, software, and cloud services from technology suppliers to resellers and business customers.

Why Do We Think SCSC Will Underperform?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 11.4% annually over the last two years
2. Earnings per share have contracted by 3.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
3. Underwhelming 8.1% return on capital reflects management’s difficulties in finding profitable growth opportunities

ScanSource is trading at $44.56 per share, or 11.7x forward P/E. Dive into our free research report to see why there are better opportunities than SCSC.

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