What a fantastic six months it’s been for Ziff Davis. Shares of the company have skyrocketed 94.3%, hitting $54.44. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Ziff Davis, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Ziff Davis Will Underperform?
We’re happy investors have made money, but we don’t have much confidence in Ziff Davis. Here are three reasons why there are better opportunities than ZD, plus one stock we’d rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Ziff Davis struggled to consistently increase demand as its $1.32 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of poor business quality.
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.
Analyzing the trend in its profitability, Ziff Davis’s adjusted operating margin decreased by 5.7 percentage points over the last five years. Even though its historical margin was healthy, shareholders will want to see Ziff Davis become more profitable in the future. Its adjusted operating margin for the trailing 12 months was 25.1%.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Ziff Davis, its EPS declined by 9% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
Final Judgment
We see the value of companies helping their customers, but in the case of Ziff Davis, we’re out. Following the recent surge, the stock trades at 10.2× forward P/E (or $54.44 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. Let us point you toward one of our top software and edge computing picks.
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