PubMatic’s stock price has taken a beating over the past six months, shedding 30.7% of its value and falling to $9.98 per share. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy PubMatic, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Even with the cheaper entry price, we're cautious about PubMatic. Here are three reasons why there are better opportunities than PUBM 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 is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last three years, PubMatic grew its sales at a sluggish 8.7% compounded annual growth rate. This was below our standard for the software sector.

2. 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 2.6%, a deceleration versus its 8.7% annualized growth for the past three years. This projection doesn't excite us and indicates its products and services will see some demand headwinds.

3. 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 65.3% gross margin over the last year. Said differently, PubMatic had to pay a chunky $34.69 to its service providers for every $100 in revenue.

Final Judgment

PubMatic’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 1.7× forward price-to-sales (or $9.98 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. Let us point you toward one of our all-time favorite software stocks.

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