Over the past six months, PubMatic’s stock price fell to $8.17. Shareholders have lost 5.4% of their capital, which is disappointing considering the S&P 500 has climbed by 1%. This might have investors contemplating their next move.
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.
Why Do We Think PubMatic Will Underperform?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid PUBM and a stock we'd rather own.
1. Customer Churn Hurts Long-Term Outlook
One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.
PubMatic’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 96% in Q4. This means PubMatic’s revenue would’ve decreased by 4% over the last 12 months if it didn’t win any new customers.
PubMatic has a weak net retention rate, signaling that some customers aren’t satisfied with its products, leading to lost contracts and revenue streams.
2. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
PubMatic’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between PubMatic’s products and its peers.
3. Shrinking Operating Margin
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Analyzing the trend in its profitability, PubMatic’s operating margin decreased by 7.4 percentage points over the last two 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. PubMatic’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 6.1%.
Final Judgment
PubMatic doesn’t pass our quality test. After the recent drawdown, the stock trades at 1.4× forward price-to-sales (or $8.17 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward a top digital advertising platform riding the creator economy.
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