Some Confidence Is Lacking In HUYA Inc.'s (NYSE:HUYA) P/S
With a median price-to-sales (or "P/S") ratio of close to 1.2x in the Entertainment industry in the United States, you could be forgiven for feeling indifferent about HUYA Inc.'s (NYSE:HUYA) P/S ratio of 0.8x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Check out our latest analysis for HUYA
How Has HUYA Performed Recently?
While the industry has experienced revenue growth lately, HUYA's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.
Want the full picture on analyst estimates for the company? Then our free report on HUYA will help you uncover what's on the horizon.
How Is HUYA's Revenue Growth Trending?
In order to justify its P/S ratio, HUYA would need to produce growth that's similar to the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 24%. The last three years don't look nice either as the company has shrunk revenue by 28% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Shifting to the future, estimates from the twelve analysts covering the company suggest revenue growth is heading into negative territory, declining 1.8% each year over the next three years. Meanwhile, the broader industry is forecast to expand by 9.8% per annum, which paints a poor picture.
With this information, we find it concerning that HUYA is trading at a fairly similar P/S compared to the industry. 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 these declining revenues are likely to weigh on the share price eventually.
What Does HUYA's P/S Mean For Investors?
While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
While HUYA's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for HUYA with six simple checks will allow you to discover any risks that could be an issue.
If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.
