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 3.5% over the past six months. This drop was discouraging since the S&P 500 held steady.
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.
Dell (DELL)
Market Cap: $78.05 billion
Founded by Michael Dell in his University of Texas dorm room in 1984 with just $1,000, Dell Technologies (NYSE: DELL) provides hardware, software, and services that help organizations build their IT infrastructure, manage cloud environments, and enable digital transformation.
Why Do We Think DELL Will Underperform?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.3% annually over the last two years
- Earnings per share lagged its peers over the last five years as they only grew by 2.1% annually
- Free cash flow margin shrank by 8.7 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Dell’s stock price of $111.52 implies a valuation ratio of 12.3x forward P/E. Read our free research report to see why you should think twice about including DELL in your portfolio.
Kyndryl (KD)
Market Cap: $9.41 billion
Born from IBM's managed infrastructure services business in a 2021 spinoff, Kyndryl (NYSE: KD) is the world's largest IT infrastructure services provider that designs, builds, and manages technology environments for enterprise customers.
Why Does KD Fall Short?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 6% annually over the last four years
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Negative returns on capital show management lost money while trying to expand the business
At $39.91 per share, Kyndryl trades at 19.5x forward P/E. If you’re considering KD for your portfolio, see our FREE research report to learn more.
Amentum (AMTM)
Market Cap: $5.31 billion
With operations spanning approximately 80 countries and a workforce of specialized engineers and technical experts, Amentum Holdings (NYSE: AMTM) provides advanced engineering and technology solutions to U.S. government agencies, allied governments, and commercial enterprises across defense, energy, and space sectors.
Why Are We Wary of AMTM?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 2.4% over the last three years was below our standards for the business services sector
- Estimated sales growth of 1.6% for the next 12 months implies demand will slow from its two-year trend
- Poor free cash flow margin of 1.6% for the last four years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Amentum is trading at $21.73 per share, or 10x forward P/E. Dive into our free research report to see why there are better opportunities than AMTM.
Stocks We Like More
Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.
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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.
