Some Confidence Is Lacking In Digimarc Corporation's (NASDAQ:DMRC) P/S
Digimarc Corporation's (NASDAQ:DMRC) price-to-sales (or "P/S") ratio of 11.8x might make it look like a strong sell right now compared to the Software industry in the United States, where around half of the companies have P/S ratios below 4.3x and even P/S below 1.9x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.
Check out our latest analysis for Digimarc
What Does Digimarc's Recent Performance Look Like?
Recent times haven't been great for Digimarc as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Digimarc.
What Are Revenue Growth Metrics Telling Us About The High P/S?
In order to justify its P/S ratio, Digimarc would need to produce outstanding growth that's well in excess of the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. The latest three year period has also seen an excellent 31% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Turning to the outlook, the next year should generate growth of 6.9% as estimated by the two analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 12%, which is noticeably more attractive.
In light of this, it's alarming that Digimarc's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.
What We Can Learn From Digimarc's P/S?
Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
It comes as a surprise to see Digimarc trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Digimarc (at least 1 which is significant), and understanding these should be part of your investment process.
It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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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