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. Keeping that in mind, here are three profitable companies to steer clear of and a few better alternatives.
Shutterstock (SSTK)
Trailing 12-Month GAAP Operating Margin: 7.6%
Originally featuring a library that included many of founder Jon Oringer’s photos, Shutterstock (NYSE: SSTK) is now a digital platform where customers can license and use hundreds of millions of pieces of content.
Why Should You Dump SSTK?
- Customer spending has dipped by 73.7% on average as it focused on growing its requests
- Sales are projected to tank by 10% over the next 12 months as demand evaporates
- Flat earnings per share over the last three years lagged its peers
Shutterstock’s stock price of $17.82 implies a valuation ratio of 3x forward EV/EBITDA. If you’re considering SSTK for your portfolio, see our FREE research report to learn more.
Starbucks (SBUX)
Trailing 12-Month GAAP Operating Margin: 7.2%
Started by three friends in Seattle’s historic Pike Place Market, Starbucks (NASDAQ: SBUX) is a globally-renowned coffeehouse chain that offers a wide selection of high-quality coffee, beverages, and food items.
Why Do We Pass on SBUX?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its menu offerings and dining experience
- Estimated sales growth of 2.9% for the next 12 months implies demand will slow from its six-year trend
- Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 6.8 percentage points
Starbucks is trading at $98.74 per share, or 39.6x forward P/E. Read our free research report to see why you should think twice about including SBUX in your portfolio.
Royal Caribbean (RCL)
Trailing 12-Month GAAP Operating Margin: 27.4%
Established in 1968, Royal Caribbean Cruises (NYSE: RCL) is a global cruise vacation company renowned for its innovative and exciting cruise experiences.
Why Is RCL Risky?
- Annual sales growth of 13.6% over the last two years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- Poor free cash flow margin of 9.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Underwhelming 4.7% return on capital reflects management’s difficulties in finding profitable growth opportunities
At $282.55 per share, Royal Caribbean trades at 16.2x forward P/E. Dive into our free research report to see why there are better opportunities than RCL.
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