Shareholders of CDW would probably like to forget the past six months even happened. The stock dropped 26.3% and now trades at $161.66. This might have investors contemplating their next move.
Is there a buying opportunity in CDW, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Even with the cheaper entry price, we don't have much confidence in CDW. Here are three reasons why we avoid CDW and a stock we'd rather own.
Why Do We Think CDW Will Underperform?
Serving as a crucial bridge between technology manufacturers and end users since 1984, CDW (NASDAQ: CDW) is a multi-brand provider of information technology solutions that helps businesses and public sector organizations select, implement, and manage hardware, software, and IT services.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, CDW’s sales grew at a tepid 3.1% compounded annual growth rate over the last five years. This was below our standard for the business services sector. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect CDW’s revenue to rise by 3.1%. While this projection suggests its newer products and services will spur better top-line performance, it is still below average for the sector.
3. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for CDW, its EPS and revenue declined by 1.4% and 6% annually over the last two years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, CDW’s low margin of safety could leave its stock price susceptible to large downswings.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of CDW, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 16.2× forward price-to-earnings (or $161.66 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
Stocks We Would Buy Instead of CDW
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