Ziff Davis has had an impressive run over the past six months as its shares have beaten the S&P 500 by 19.2%. The stock now trades at $43.71, marking a 21.7% gain. This 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? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Ziff Davis Will Underperform?

We’re happy investors have made money, but we're swiping left on Ziff Davis for now. Here are three reasons we avoid ZD 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 have short-term success, but a top-tier one grows for years. Unfortunately, Ziff Davis struggled to consistently increase demand as its $1.45 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. 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 4.1% 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.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Ziff Davis’s margin dropped by 9.3 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Ziff Davis’s free cash flow margin for the trailing 12 months was 19.8%.

Final Judgment

We see the value of companies helping their customers, but in the case of Ziff Davis, we’re out. With its shares beating the market recently, the stock trades at 6.3× forward P/E (or $43.71 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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