There's Reason For Concern Over PubMatic, Inc.'s (NASDAQ:PUBM) Price

Explore PubMatic's Fair Values from the Community and select yours

When close to half the companies in the Media industry in the United States have price-to-sales ratios (or "P/S") below 1x, you may consider PubMatic, Inc. (NASDAQ:PUBM) as a stock to potentially avoid with its 1.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for PubMatic

What Does PubMatic's P/S Mean For Shareholders?

PubMatic could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think PubMatic's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For PubMatic?

There's an inherent assumption that a company should outperform the industry for P/S ratios like PubMatic's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 3.6%. The solid recent performance means it was also able to grow revenue by 21% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 4.4% during the coming year according to the eleven analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 2.4%, which is not materially different.

With this information, we find it interesting that PubMatic is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Analysts are forecasting PubMatic's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for PubMatic (1 is significant) you should be aware of.

If you're unsure about the strength of PubMatic's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.