3 Reasons ZD is Risky and 1 Stock to Buy Instead

3 Reasons ZD is Risky and 1 Stock to Buy Instead

Ziff Davis's 26.6% return over the past six months has outpaced the S&P 500 by 19.7%, and its stock price has climbed to $45.78 per share. This performance may have investors wondering how to approach the situation.

Is now the time to buy Ziff Davis, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it's free.

Why Do We Think Ziff Davis Will Underperform?

We're glad investors have benefited from the price increase, but we're swiping left on Ziff Davis for now. Here are three reasons we avoid ZD, plus one stock we'd rather own.

1. Long-Term Revenue Growth Flatter Than a Pancake

A company's long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Ziff Davis struggled to consistently increase demand as its $1.39 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn't a great result and signals it's a low quality business.Ziff Davis Quarterly Revenue

2. Shrinking Adjusted Operating Margin

Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.

Analyzing the trend in its profitability, Ziff Davis's adjusted operating margin decreased by 9.2 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 25.7%.Ziff Davis Trailing 12-Month Operating Margin (Non-GAAP)

3. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Ziff Davis, its EPS declined by 7% 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.Ziff Davis Trailing 12-Month EPS (Non-GAAP)

Final Judgment

Ziff Davis doesn't pass our quality test. With its shares topping the market in recent months, the stock trades at 9× forward P/E (or $45.78 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We'd recommend looking at one of our all-time favorite software stocks.

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