Shareholders of Ziff Davis would probably like to forget the past six months even happened. The stock dropped 43.3% and now trades at $31.72. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Ziff Davis, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Ziff Davis Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in Ziff Davis. Here are three reasons why ZD doesn't excite us and a 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 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 $1.42 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and signals it’s a low quality business. 
2. 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 1.6% annually over the last five years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences.If the tide turns unexpectedly, Ziff Davis’s low margin of safety could leave its stock price susceptible to large downswings.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Ziff Davis’s margin dropped by 17.6 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Ziff Davis’s free cash flow margin for the trailing 12 months was 16.3%.
Final Judgment
Ziff Davis doesn’t pass our quality test. Following the recent decline, the stock trades at 4.4× forward P/E (or $31.72 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d suggest looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of Ziff Davis
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