PubMatic (PUBM)

Programmatic advertising platform Pubmatic (NASDAQ: PUBM) announced better-than-expected revenue in Q2 CY2025, with sales up 5.7% year on year to $71.1 million. On the other hand, next quarter’s revenue guidance of $63.5 million was less impressive, coming in 10.8% below analysts’ estimates. Its non-GAAP profit of $0.05 per share was significantly above analysts’ consensus estimates.

Company Overview

Founded in 2006 as an online ad platform helping ad sellers, Pubmatic (NASDAQ: PUBM) is a fully integrated cloud-based programmatic advertising platform.

The digital advertising market is large, growing, and becoming more diverse, both in terms of audiences and media. As a result, there is a growing need for software that enables advertisers to use data to automate and optimize ad placements.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, PubMatic grew its sales at a weak 5.2% compounded annual growth rate. This was below our standard for the software sector and is a tough starting point for our analysis.

This quarter, PubMatic reported year-on-year revenue growth of 5.7%, and its $71.1 million of revenue exceeded Wall Street’s estimates by 4.4%. Company management is currently guiding for a 11.5% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5.1% over the next 12 months, similar to its three-year rate. This projection is underwhelming and implies its newer products and services will not catalyze better top-line performance yet.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

PubMatic is extremely efficient at acquiring new customers, and its CAC payback period checked in at 10.8 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

For software companies like PubMatic, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

PubMatic’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 64.9% gross margin over the last year. That means PubMatic paid its providers a lot of money ($35.13 for every $100 in revenue) to run its business.

In Q2, PubMatic produced a 62.6% gross profit margin, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

PubMatic’s expensive cost structure has contributed to an average operating margin of negative 1.3% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if PubMatic reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.

Looking at the trend in its profitability, PubMatic’s operating margin decreased by 5 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. PubMatic’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q2, PubMatic generated a negative 7.7% operating margin. The company's consistent lack of profits raise a flag.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

PubMatic has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 9.7%, subpar for a software business.

PubMatic’s free cash flow clocked in at $9.27 million in Q2, equivalent to a 13% margin. This result was good as its margin was 2.8 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts predict PubMatic’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 9.7% for the last 12 months will increase to 25.8%, giving it more flexibility for investments, share buybacks, and dividends.

Companies with more cash than debt have lower bankruptcy risk.

PubMatic is a well-capitalized company with $117.6 million of cash and $45.25 million of debt on its balance sheet. This $72.32 million net cash position is 13.6% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly PubMatic blew past analysts’ EBITDA expectations this quarter. We were also happy its revenue outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed and its EBITDA guidance for next quarter fell short of Wall Street’s estimates. This is clearly weighing on shares, and the stock traded down 22.7% to $8.16 immediately following the results.

Updated: November 8, 2025 at 9:26 PM EST

Are you wondering whether to buy PubMatic or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

PubMatic doesn’t pass our quality test. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its declining operating margin shows it’s becoming less efficient at building and selling its software. And while the company’s efficient sales strategy allows it to target and onboard new users at scale, the downside is its gross margins show its business model is much less lucrative than other companies.

PubMatic’s price-to-sales ratio based on the next 12 months is 1.3x. While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $11.28 on the company (compared to the current share price of $7.54).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.