Allot Ltd.'s (NASDAQ:ALLT) Prospects Need A Boost To Lift Shares
Allot Ltd.'s (NASDAQ:ALLT) price-to-sales (or "P/S") ratio of 0.9x might make it look like a strong buy right now compared to the Software industry in the United States, where around half of the companies have P/S ratios above 4.4x and even P/S above 10x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.
See our latest analysis for Allot
What Does Allot's Recent Performance Look Like?
Allot hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Allot.
What Are Revenue Growth Metrics Telling Us About The Low P/S?
The only time you'd be truly comfortable seeing a P/S as depressed as Allot's is when the company's growth is on track to lag the industry decidedly.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 16%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 11% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.
Turning to the outlook, the next three years should generate growth of 8.6% each year as estimated by the three analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 13% per annum, which is noticeably more attractive.
With this information, we can see why Allot is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Bottom Line On Allot's P/S
Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
We've established that Allot maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Allot (1 doesn't sit too well with us) you should be aware of.
If these risks are making you reconsider your opinion on Allot, explore our interactive list of high quality stocks to get an idea of what else is out there.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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