Over the past six months, Taboola has been a great trade, beating the S&P 500 by 7.5%. Its stock price has climbed to $3.32, representing a healthy 17.7% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Taboola, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Taboola Not Exciting?

Despite the momentum, we're sitting this one out for now. Here are three reasons we avoid TBLA and a stock we'd rather own.

1. EPS Barely Growing

Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Taboola’s full-year EPS grew at a weak 2% compounded annual growth rate over the last three years, worse than the broader business services sector.

2. 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, Taboola’s margin dropped meaningfully over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Taboola’s free cash flow margin for the trailing 12 months was 9.1%.

3. Previous Growth Initiatives Have Lost Money

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Taboola’s five-year average ROIC was negative 4.9%, meaning management lost money while trying to expand the business. Its returns were among the worst in the business services sector.

Final Judgment

Taboola isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 8.2× forward EV-to-EBITDA (or $3.32 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward one of our all-time favorite software stocks.

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