PubMatic (PUBM): Buy, Sell, or Hold Post Q3 Earnings?

December 16, 2024 at 03:39 AM EST

PUBM Cover Image

PubMatic’s stock price has taken a beating over the past six months, shedding 24.3% of its value and falling to $16.00 per share. This may have investors wondering how to approach the situation.

Is there a buying opportunity in PubMatic, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Despite the more favorable entry price, we're swiping left on PubMatic for now. Here are three reasons why PUBM doesn't excite us and a stock we'd rather own.

Why Is PubMatic Not Exciting?

Founded in 2006 as an online ad platform helping ad sellers, Pubmatic (NASDAQ: PUBM) is a fully integrated cloud-based programmatic advertising platform.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance signals its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, PubMatic grew its sales at a 11.8% annual rate. Although this growth is solid on an absolute basis, it fell short of our benchmark for the software sector. PubMatic Quarterly Revenue

2. Low Gross Margin Reveals Weak Structural Profitability

For software companies like PubMatic, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

PubMatic’s gross margin is worse than the software industry average, giving it less room than its competitors to hire new talent that can expand its products and services. As you can see below, it averaged a 65.5% gross margin over the last year. Said differently, PubMatic had to pay a chunky $34.54 to its service providers for every $100 in revenue. PubMatic Trailing 12-Month Gross Margin

3. 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 PubMatic’s revenue to rise by 5.8%, a deceleration versus its 11.8% annualized growth for the past three years. This projection doesn't excite us and implies its products and services will face some demand challenges.

Final Judgment

PubMatic isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 2.6× forward price-to-sales (or $16.00 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at Uber, whose profitability just reached an inflection point.

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