What a brutal six months it’s been for Gartner. The stock has dropped 35.4% and now trades at $146.13, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy Gartner, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Gartner Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid IT and a stock we'd rather own.
1. Weak Constant Currency Growth Points to Soft Demand
In addition to reported revenue, constant currency revenue is a useful data point for analyzing IT Services & Consulting companies. This metric excludes currency movements, which are outside of Gartner’s control and are not indicative of underlying demand.
Over the last two years, Gartner’s constant currency revenue averaged 4.1% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Projected Revenue Growth Shows Limited Upside
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 Gartner’s revenue to stall, a deceleration versus its 9.1% annualized growth for the past five years. This projection doesn't excite us and suggests its products and services will face some demand challenges.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Gartner’s margin dropped by 6.3 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Gartner’s free cash flow margin for the trailing 12 months was 19.4%.
Final Judgment
Gartner isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 9.9× forward P/E (or $146.13 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d suggest looking at one of our all-time favorite software stocks.
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