Shareholders of Manhattan Associates would probably like to forget the past six months even happened. The stock dropped 37.9% and now trades at $135.72. This may have investors wondering how to approach the situation.

Is now the time to buy Manhattan Associates, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Manhattan Associates Not Exciting?

Despite the more favorable entry price, we're swiping left on Manhattan Associates for now. Here are three reasons we avoid MANH and a stock we'd rather own.

1. Weak Billings Point to Soft Demand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Manhattan Associates’s billings came in at $310.2 million in Q4, and over the last four quarters, its year-on-year growth averaged 4.1%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers.

2. Low Gross Margin Reveals Weak Structural Profitability

For software companies like Manhattan Associates, 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.

Manhattan Associates’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 56.3% gross margin over the last year. Said differently, Manhattan Associates had to pay a chunky $43.68 to its service providers for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Manhattan Associates has seen gross margins improve by 2.7 percentage points over the last 2 year, which is very good in the software space.

3. Operating Margin in Limbo

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Looking at the trend in its profitability, Manhattan Associates’s operating margin might fluctuated slightly but has generally stayed the same over the last two years. 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. Its operating margin for the trailing 12 months was 25.9%.

Final Judgment

Manhattan Associates isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 8× forward price-to-sales (or $135.72 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.

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