3 Services Stocks with Mounting Challenges

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 2.4% over the past six months. This drawdown was disheartening since the S&P 500 stood firm.

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. On that note, here are three services stocks we’re steering clear of.

Plexus (PLXS)

Market Cap: $3.59 billion

With over 20,000 team members across 26 global facilities, Plexus (NASDAQ:PLXS) designs, manufactures, and services complex electronic products for companies in aerospace/defense, healthcare, and industrial sectors.

Why Are We Hesitant About PLXS?

1. Sales tumbled by 3.6% annually over the last two years, showing market trends are working against its favor during this cycle
2. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 1.7% annually
3. Poor free cash flow margin of 2.9% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

Plexus’s stock price of $132.70 implies a valuation ratio of 18.2x forward P/E. Read our free research report to see why you should think twice about including PLXS in your portfolio.

SAIC (SAIC)

Market Cap: $5.75 billion

With over five decades of experience supporting national security missions, Science Applications International Corporation (NASDAQ:SAIC) provides technical, engineering, and enterprise IT services primarily to U.S. government agencies and military branches.

Why Do We Think SAIC Will Underperform?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.5% annually over the last two years
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.7%
3. Low returns on capital reflect management’s struggle to allocate funds effectively

SAIC is trading at $121.92 per share, or 13.4x forward P/E. To fully understand why you should be careful with SAIC, check out our full research report (it’s free).

WEBTOON (WBTN)

Market Cap: $1.16 billion

Pioneering a vertical-scrolling format optimized for mobile devices, WEBTOON Entertainment (NASDAQ:WBTN) operates a global platform where creators publish serialized web-comics and web-novels that users can read in bite-sized episodes.

Why Are We Wary of WBTN?

1. Number of monthly active users has disappointed over the past two years, indicating weak demand for its offerings
2. Historically negative EPS casts doubt for cautious investors and clouds its long-term earnings prospects
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.8% for the last three years

At $8.76 per share, WEBTOON trades at 21.1x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including WBTN in your portfolio.

Stocks We Like More

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