On Friday, the Wall Street Journal reported about potential safety issues at caregiver platform Care.com (NYSE:CRCM). Investors instantly took notice. Care.com stock had hit a five-year high at the beginning of the month; yet CRCM stock dropped 13% on Monday and another 5% on Tuesday.

Some investors might argue that the sell-off is overdone — and, in fact, that Care.com hasn’t done anything wrong. As CEO Sheila Lirio Marcelo told the WSJ, “Care.com is a marketplace platform, like Indeed or LinkedIn.” Customers are warned that Care.com is not aggressively screening caregivers — and that background checks might be needed (and are available through the site, albeit for an additional fee).

But from an investment standpoint, it hardly matters whether the argument made by the WSJ is fair. A somewhat similar issue hit a very different stock last week. National Beverage (NASDAQ:FIZZ), maker of LaCroix sparkling water, saw its revenue surprisingly decline after a lawsuit alleged the use of artificial (and potentially dangerous) flavors. That lawsuit seems scurrilous — yet FIZZ is down by over 40% since it was filed.

If the WSJ article hurts Care.com’s brand image, even a two-day, 17% decline, might not be enough. But the other issue is that the negative publicity isn’t the only issue here. CRCM stock is far from cheap, and growth, while solid, doesn’t look like enough to support the current valuation. In that context, the declines on Monday and Tuesday could be just the beginning.

Care.com Stock Rebounds

Care.com truly has executed an impressive turnaround. The stock started plunging soon after its 2014 IPO. An acquisition that year of subscription provider Citrus Lane was a disaster; the business was shuttered by the end of 2015. Short-sellers immediately questioned the viability of the company’s business model, arguing that “matched” caregivers and their clients would simply depart the platform. CRCM stock traded as high as $30 after its IPO; it was at $5 by late 2015.

But the company managed to right the ship. A 2016 investment by CapitalG (then known as Google Capital), the venture capital arm of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), helped shore up investor confidence. Google’s search expertise appears to have helped Care.com significantly lower its customer acquisition costs.

Meanwhile, revenue has climbed steadily. And the nature of the platform model is that higher revenue equals higher margins — and accelerating profits. Adjusted EBITDA was negative $5 million in 2015 — and $32 million in 2018.

As a result, CRCM soared. It cleared $25 last month — a 400% gain. And then the bottom started falling out.

Did Earnings Change the Case for CRCM Stock?

The day before the WSJ article was published, Care.com released its fourth-quarter earnings. CRCM stock dropped 5.7% on the news.

From a headline standpoint, it’s difficult to see why the stock would have fallen. Adjusted EPS beat Street expectations; revenue missed narrowly. (Growth was 0.3 points lower than the average analyst estimate.) 2019 guidance appears to have been in-line with analyst expectations.

It’s possible investors were looking for a “beat and raise” report — and sold CRCM when it didn’t arrive. Again, the stock was at a five-year high before dipping modestly before earnings.

That said, guidance doesn’t seem particularly impressive. At the midpoint, Care.com is expecting 14% revenue growth next year. Adjusted EBITDA, however, should rise just 5.6%. Non-GAAP EPS guidance of 73 cents to 78 cents suggests a possible decline against 2018’s 77-cent print.

An argument existed on Thursday that the run in Care.com stock had gone a little too far. The stock traded at a high-20’s multiple to 2019 EPS guidance. Yet earnings growth was guided to be relatively light. It’s certainly possible that CRCM stock would have sold off even had the article not been published.

Is CRCM Cheap Enough?

Back below $20, three key issues should keep investors on the sidelines. The first is that the article may affect business going forward.

To be fair, the WSJ wasn’t the first to point out the potential dangers inherent in the platform. A case in Illinois, in which a Care.com babysitter pled guilty to murder of an infant, made national headlines in 2016, as have several others. A short seller raised similar issues, and others, last year. And Care.com, as it told the Journal, isn’t necessarily responsible for the behavior of everyone on its platform. Criminals and scammers use all sorts of platforms, from Google to Facebook (NASDAQ:FB) to Craigslist.

Still, there’s a clear risk that the negative publicity will harm the Care.com brand. But we know for a fact that the article is likely to hit the company’s margins.

On Monday, the company disclosed changes to its policies in an 8-K filing. It won’t post caregivers until its “preliminary screening process” has been completed. It is “exploring solutions” for identity verification and better background checks. It’s removing some business listings (which total only drive 0.5% of sales), and creating a new board committee to focus on safety.

These moves are going to add complexity to the platform and cost to Care.com. Marcelo admitted as much when she told the Journal that “our mission has been to provide a more cost-effective alternative to nanny agencies”. The worry, given potential liability for bad actors (whether legally or simply in terms of another hit to the brand), is that Care.com may not be able to focus so purely on that mission.

On the Sidelines

The third problem here is that CRCM simply isn’t that cheap, even 20% and more below recent highs. On an earnings basis, CRCM stock looks closer to a value play. Backing out nearly $4 per share in cash, CRCM trades at 21x the midpoint of 2019 EPS guidance. EV/EBITDA looks a bit more aggressive, but still resasonable, at 16x.

The issue is that both metrics back out a huge amount of stock-based compensation. (Care.com also owes ‘paid in kind’ dividends to CapitalG for four more years.) Share-based compensation represented well over half of 2018 Adjusted EBITDA — and free cash flow. Add that back and CRCM looks much more expensive.

And given the headline risk and the lack of growth, it looks too expensive. Admittedly, the business isn’t doomed. Indeed, the new policies hopefully will improve safety on the site.

But that’s not necessarily a good thing for Care.com stock. In fact, it might be one more thing for investors to worry about.

As of this writing, Vince Martin has no positions in any securities mentioned.