ON24 has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 35.8% and now trades at $8.05. This run-up might have investors contemplating their next move.
Is now the time to buy ON24, 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 Do We Think ON24 Will Underperform?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons there are better opportunities than ONTF and a stock we'd rather own.
1. Declining Billings Reflect Product and Sales Weakness
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
ON24’s billings came in at $37.16 million in Q4, and it averaged 5.8% year-on-year declines over the last four quarters. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation. 
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 ON24’s revenue to stall. Although this projection implies its newer products and services will fuel better top-line performance, it is still below the sector average.
3. Operating Losses Sound the Alarms
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.
ON24’s expensive cost structure has contributed to an average operating margin of negative 25.7% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if ON24 reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.
Final Judgment
We see the value of companies addressing major business pain points, but in the case of ON24, we’re out. With its shares topping the market in recent months, the stock trades at 2.5× forward price-to-sales (or $8.05 per share). This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at one of our top digital advertising picks.
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