3 Services Stocks Skating on Thin Ice

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 3.3% over the past six months. This drop was almost identical to the S&P 500’s decline.

While some companies have durable competitive advantages that enable them to grow in any landscape, the odds aren’t great for the ones we’re analyzing today. With that said, here are three services stocks we’re passing on.

Liberty Broadband (LBRDK)

Market Cap: $12.19 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 Does LBRDK Fall Short?

1. Annual revenue growth of 2.1% 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. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

Liberty Broadband is trading at $85.05 per share, or 16.3x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than LBRDK.

Ingram Micro (INGM)

Market Cap: $4.17 billion

Operating as the crucial link in the global technology supply chain with a presence in 57 countries, Ingram Micro (NYSE:INGM) is a global technology distributor that connects manufacturers with resellers, providing hardware, software, cloud services, and logistics expertise.

Why Should You Dump INGM?

1. Annual sales declines of 2.5% for the past two years show its products and services struggled to connect with the market during this cycle
2. Earnings per share have contracted by 7.2% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
3. Low free cash flow margin of 0.6% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

At $17.74 per share, Ingram Micro trades at 5.7x forward price-to-earnings. Check out our free in-depth research report to learn more about why INGM doesn’t pass our bar.

Vimeo (VMEO)

Market Cap: $867.1 million

Originally launched in 2004 as a platform for filmmakers seeking a high-quality alternative to YouTube, Vimeo (NASDAQ:VMEO) provides cloud-based video creation, editing, hosting, and distribution software that helps businesses and creators make, manage, and share professional-quality videos.

Why Does VMEO Worry Us?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.9% annually over the last two years
2. Smaller revenue base of $417 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
3. Anticipated sales growth of 2.1% for the next year implies demand will be shaky

Vimeo’s stock price of $5.26 implies a valuation ratio of 17.6x forward EV-to-EBITDA. To fully understand why you should be careful with VMEO, check out our full research report (it’s free).

Stocks We Like More

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