Ad-tech software company PubMatic, Inc. (PUBM - Get Rating) has gained 120.1% since its stock market debut on December 9. The stock caught investors’ attention on its listing day because it was listed on NYSE at $20 per share, above the expected range of $16-$18 per share. The company raised $118 million through the IPO, leveraging its 14 years of experience in the tech space. The stock has gained 131.8% year-to-date, and 72.1% over the past month.

PUBM is focused on building its cloud computing platform and establishing itself as a business-to-business platform. Its  major clients include Verizon Communications Inc. (VZ), News Corporation (NWS) and Electronic Arts, Inc. (EA).

But despite having a sound operational model, PUBM’s future growth is uncertain given immense competition from tech giants that are dominating the advertising market.

Here’s what I think could shape PUBM’s performance in the near term:

Stiff Competition

PUBM’s main competition includes tech giants such as Alphabet, Inc. (GOOGL - Get Rating) and Trade Desk, Inc. (TTD - Get Rating). Moreover, with digital advertising a red-hot trend as the world increasingly adopts  virtual communications and connections, many new entrants are popping up, increasing PUBM’s competition. The broad  market reach of the tech giants and their financial flexibility could be  major headwinds for PUBM and deter its growth. Moreover, the company’s CEO, Rajeev Goel, recently stated in an interview that publishers often work with up to 6 digital advertising agencies at a time, in acknowledging  intense competition in the field.

Wavering Financials

PUBM’s revenues have increased 64% year-over-year to $56.20 million in the fourth quarter ended December 31, 2020. Its adjusted EBITDA has risen 190% from the same period last year to $26.90 million, while its net income grew 358.5% from the year-ago value to $18.80 million. EPS has increased 466.7% from the prior year quarter to $0.34.

The company’s stellar performance in the fourth quarter have driven the stock to a 7.5%  gain since the results were released on February 26, 2021. However, an in-depth view of its fundamentals paints a different picture. Despite a market capitalization value of more than $3 billion, PUBM has  generated only $148.75 million in  revenues in the railing twelve months. Also, the company reported a negative levered  free cash flow balance of $15.12 million over the past year, indicating a trailing 12-month free cash flow margin of 10.17%. PUBM’s trailing 12-month asset turnover ratio and cash from operations balance of 0.51 and $24.33 million are significantly lower than the respective industry averages.

Trading at Sky-High Valuations

In terms of forward p/e, PUBM is currently trading at 324.05x, 1559.8% higher than the industry average  19.52x. The stock’s forward price/sales of 16.75x is 1192.7% higher than the industry average 1.30x.

Its forward EV/ EBIT and ev/sales ratios of 199.65 and 16.21, respectively,  are significantly higher than their industry averages.

Consensus Price Target Indicates Potential Slump

PUBM is currently trading 13.2% below its all-time high of $74.65. Analysts expect the stock to decline further to hit $41 soon, indicating a potential downside of 11.2%.

POWR Ratings Reflect Bleak Outlook

PUBM has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

PUBM  has a C grade for Quality, Growth and Value. These are justified, given its current valuation and financials. Analysts expect PUBM’s EPS to decline 56.5% in fiscal 2021. However, a consensus revenue estimate of $185 million for the current year represents  a 24.4% improvement year-over-year.

Of the 109 stocks in the C-rated Software – Application industry, PUBM is ranked #37. In addition to the grades I’ve highlighted, you can check out additional POWR Ratings for Sentiment, Momentum and Stability here.

There are 26 stocks in the Software – Application industry with an overall rating of A or B. Click here to see them.

Bottom line

PUBM is a relatively new stock in the advertising software space and has been grabbing attention as people expect the company to dominate the advertising industry in the future. Tech giants such as Alphabet and Facebook, Inc. (FB), whose revenue models are primarily built on  advertising revenues, are currently under federal scrutiny. However, with less than $150 million in annual revenues, PUBM doesn’t have the financial backing to take on the industry leaders. While the company’s recent developments reflect promise, we think it advisable to wait until its financial prospects improve before investing in the stock.

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PUBM shares were trading at $72.51 per share on Monday afternoon, up $7.70 (+11.88%). Year-to-date, PUBM has gained 159.33%, versus a 4.44% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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