Connection (CNXN)

IT solutions provider Connection (NASDAQ:CNXN) missed Wall Street’s revenue expectations in Q3 CY2025, with sales falling 2.2% year on year to $709.1 million. Its non-GAAP profit of $0.97 per share was 3.5% below analysts’ consensus estimates.

Company Overview

Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ:CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.

IT Distribution & Solutions will be buoyed by the increasing complexity of IT ecosystems, rising cloud adoption, and demand for cybersecurity solutions. Enterprises are less likely than ever to embark on these complicated journeys solo, and companies in the sector boast expertise and scale in these areas. However, cloud migration also means less need for hardware, which could dent demand for large portions of the product portfolio and hurt margins. Additionally, planning for potentially supply chain disruptions is ongoing, as the COVID-19 pandemic showed how damaging a pause in global trade could be in areas like semiconductor procurement.

Connection competes with other national IT solutions providers such as CDW Corporation, SHI, and Insight Enterprises. The company also faces competition from manufacturers selling directly to customers (like Dell, HP, and Apple), cloud providers (including Amazon Web Services, Google, and Microsoft), and large system integrators such as Accenture, CGI, and IBM.

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.

With $2.88 billion in revenue over the past 12 months, Connection is a mid-sized business services company, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale.

As you can see below, Connection’s 1.8% annualized revenue growth over the last five years was sluggish. This shows it failed to generate demand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. Connection’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

This quarter, Connection missed Wall Street’s estimates and reported a rather uninspiring 2.2% year-on-year revenue decline, generating $709.1 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 6.6% over the next 12 months, an improvement versus the last two years. This projection is above the sector average and indicates its newer products and services will fuel better top-line performance.

Connection’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same, averaging 3.6% over the last five years. This profitability was lousy for a business services business and caused by its suboptimal cost structure.

Analyzing the trend in its profitability, Connection’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Connection generated an operating margin profit margin of 4.3%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Connection’s EPS grew at an unimpressive 7.2% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1.8% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Connection, its two-year annual EPS growth of 4.5% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q3, Connection reported adjusted EPS of $0.97, in line with the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Connection’s full-year EPS of $3.32 to grow 15.1%.

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.

Connection has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.1%, subpar for a business services business.

Taking a step back, an encouraging sign is that Connection’s margin expanded by 2.3 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Connection’s free cash flow clocked in at $62.28 million in Q3, equivalent to a 8.8% margin. This result was good as its margin was 1.7 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Connection historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 14%, somewhat low compared to the best business services companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Connection’s ROIC increased by 2.8 percentage points annually over the last few years. This is a good sign, and we hope the company can continue improving.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Connection is a profitable, well-capitalized company with $399.2 million of cash and $437,000 of debt on its balance sheet. This $398.8 million net cash position is 25.1% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We struggled to find many positives in these results. Its revenue missed and its EPS fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock remained flat at $60.88 immediately after reporting.

Updated: December 4, 2025 at 11:07 PM EST

Before deciding whether to buy Connection or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Connection doesn’t pass our quality test. To begin with, its revenue growth was weak over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its operating margins reveal poor profitability compared to other business services companies. On top of that, its low free cash flow margins give it little breathing room.

Connection’s P/E ratio based on the next 12 months is 16.3x. This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $76 on the company (compared to the current share price of $58.38).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.