Over the past six months, Exponent’s shares (currently trading at $75.10) have posted a disappointing 19.3% loss while the S&P 500 was down 1.6%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Exponent, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Exponent Not Exciting?
Even though the stock has become cheaper, we're cautious about Exponent. Here are three reasons why we avoid EXPO and a stock we'd rather own.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within business services, a stretched historical view may miss recent innovations or disruptive industry trends. Exponent’s annualized revenue growth of 4.5% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak. 
2. Fewer Distribution Channels Limit its Ceiling
With $518.7 million in revenue over the past 12 months, Exponent is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Exponent’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Exponent isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 35.9× forward P/E (or $75.10 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward one of our top software and edge computing picks.
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