While profitability is essential, it doesn’t guarantee long-term success. Some companies that rest on their margins will lose ground as competition intensifies — as Jeff Bezos said, “Your margin is my opportunity”.
A business making money today isn’t necessarily a winner, which is why we analyze companies across multiple dimensions at StockStory. That said, here are three profitable companies to steer clear of and a few better alternatives.
Dropbox (DBX)
Trailing 12-month GAAP operating margin: 26.6%
Originally named after the founders' tendency to "drop" files into a shared folder, Dropbox (NASDAQ: DBX) provides a content collaboration platform that helps individuals and teams store, organize, share, and work on files from anywhere.
Why Is DBX Risky?
- Offerings struggled to generate interest as its billings were flat over the last year
- Sales are projected to be flat over the next 12 months and imply weak demand
- Operating margin expansion of 2.3 percentage points over the last year shows the company optimized its expenses
Dropbox’s stock price of $36.63 implies a valuation ratio of 3.2x forward price-to-sales. If you’re considering DBX for your portfolio, see our FREE research report to learn more.
Hilton Grand Vacations (HGV)
Trailing 12-month GAAP operating margin: 15%
Spun off from Hilton Worldwide in 2017, Hilton Grand Vacations (NYSE: HGV) is a global timeshare company that provides travel experiences for its customers through its timeshare resorts and club membership programs.
Why Do We Steer Clear of HGV?
- Number of members has disappointed over the past two years, indicating weak demand for its offerings
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Hilton Grand Vacations is trading at $43.64 per share, or 9.3x forward P/E. Read our free research report to see why you should think twice about including HGV in your portfolio.
Lumen (LUMN)
Trailing 12-month GAAP operating margin: 1.3%
With approximately 350,000 route miles of fiber optic cable spanning North America and the Asia Pacific, Lumen Technologies (NYSE: LUMN) operates a vast fiber optic network that provides communications, cloud connectivity, security, and IT solutions to businesses and consumers.
Why Are We Bearish on LUMN?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 10.5% annually over the last five years
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
- Free cash flow margin dropped by 13.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $3.98 per share, Lumen trades at 5.2x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than LUMN.
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