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".
Not all profitable companies are created equal, and that’s why we built StockStory - to help you find the ones that truly shine bright. Keeping that in mind, here are three profitable companies to steer clear of and a few better alternatives.
Q2 Holdings (QTWO)
Trailing 12-Month GAAP Operating Margin: 2.8%
With a platform powering digital services for approximately 25 million account holders across America, Q2 Holdings (NYSE: QTWO) provides cloud-based digital solutions that help financial institutions, fintechs, and alternative finance companies deliver modern banking experiences to their customers.
Why Do We Think Twice About QTWO?
- Customers were hesitant to make long-term commitments to its software as its 11.3% average ARR growth over the last year was sluggish
- Estimated sales growth of 10.7% for the next 12 months implies demand will slow from its two-year trend
- Gross margin of 53.4% is way below its competitors, leaving less money to invest in areas like marketing and R&D
Q2 Holdings’s stock price of $70.56 implies a valuation ratio of 5.7x forward price-to-sales. Read our free research report to see why you should think twice about including QTWO in your portfolio.
National Vision (EYE)
Trailing 12-Month GAAP Operating Margin: 1.4%
Operating under multiple brands, National Vision (NYSE: EYE) sells optical products such as eyeglasses and provides optical services such as eye exams.
Why Do We Steer Clear of EYE?
- Products have few die-hard fans as sales have declined by 1.6% annually over the last three years
- Reduction in its number of stores signals a focus on profitability through targeted consolidation
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its falling returns suggest its earlier profit pools are drying up
At $26.13 per share, National Vision trades at 28.6x forward P/E. Check out our free in-depth research report to learn more about why EYE doesn’t pass our bar.
GEO Group (GEO)
Trailing 12-Month GAAP Operating Margin: 9.5%
With a global footprint spanning three continents and approximately 81,000 beds across 100 facilities, GEO Group (NYSE: GEO) operates secure facilities, processing centers, and reentry services for government agencies in the United States, Australia, and South Africa.
Why Are We Out on GEO?
- 1.1% annual revenue growth over the last five years was slower than its business services peers
- Day-to-day expenses have swelled relative to revenue over the last four years as its adjusted operating margin fell by 6.6 percentage points
- Free cash flow margin shrank by 11.7 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
GEO Group is trading at $16.69 per share, or 13.7x forward P/E. If you’re considering GEO for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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