Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. 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 3.3% gain has fallen behind the S&P 500’s 11.8% rise.
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. Keeping that in mind, here are three services stocks that may face trouble.
Ibotta (IBTA)
Market Cap: $647.6 million
Originally launched as a way to make grocery shopping more rewarding for budget-conscious consumers, Ibotta (NYSE:IBTA) is a mobile shopping app that allows consumers to earn cash back on everyday purchases by completing tasks and submitting receipts.
Why Are We Cautious About IBTA?
- Smaller revenue base of $352.2 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Projected sales decline of 9.7% for the next 12 months points to a tough demand environment ahead
Ibotta is trading at $24.80 per share, or 18.5x forward P/E. To fully understand why you should be careful with IBTA, check out our full research report (it’s free for active Edge members).
Kforce (KFRC)
Market Cap: $482.1 million
With nearly 60 years of matching skilled professionals with the right opportunities, Kforce (NYSE:KFRC) is a professional staffing company that specializes in placing technology and finance experts with businesses on both temporary and permanent bases.
Why Are We Out on KFRC?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Earnings per share have contracted by 1.4% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Eroding returns on capital suggest its historical profit centers are aging
At $27.96 per share, Kforce trades at 12.9x forward P/E. Check out our free in-depth research report to learn more about why KFRC doesn’t pass our bar.
Zebra (ZBRA)
Market Cap: $11.7 billion
Taking its name from the black and white stripes of barcodes, Zebra Technologies (NASDAQ:ZBRA) provides barcode scanners, mobile computers, RFID systems, and other data capture technologies that help businesses track assets and optimize operations.
Why Are We Hesitant About ZBRA?
- Muted 1.7% annual revenue growth over the last two years shows its demand lagged behind its business services peers
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7 percentage points
Zebra’s stock price of $232.18 implies a valuation ratio of 13.4x forward P/E. Dive into our free research report to see why there are better opportunities than ZBRA.
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