Not Many Are Piling Into Motorsport Games Inc. (NASDAQ:MSGM) Stock Yet As It Plummets 30%
Motorsport Games Inc. (NASDAQ:MSGM) shares have retraced a considerable 30% in the last month, reversing a fair amount of their solid recent performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 50% share price drop.
Although its price has dipped substantially, it's still not a stretch to say that Motorsport Games' price-to-sales (or "P/S") ratio of 1.6x right now seems quite "middle-of-the-road" compared to the Entertainment industry in the United States, where the median P/S ratio is around 1.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
Check out our latest analysis for Motorsport Games
How Motorsport Games Has Been Performing
Motorsport Games 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. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Motorsport Games.
What Are Revenue Growth Metrics Telling Us About The P/S?
There's an inherent assumption that a company should be matching the industry for P/S ratios like Motorsport Games' to be considered reasonable.
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 32%. The last three years don't look nice either as the company has shrunk revenue by 13% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 47% per year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 10% per year, which is noticeably less attractive.
With this information, we find it interesting that Motorsport Games is trading at a fairly similar P/S compared to the industry. It may be that most investors aren't convinced the company can achieve future growth expectations.
What Does Motorsport Games' P/S Mean For Investors?
With its share price dropping off a cliff, the P/S for Motorsport Games looks to be in line with the rest of the Entertainment industry. 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.
We've established that Motorsport Games currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.
Having said that, be aware Motorsport Games is showing 5 warning signs in our investment analysis, and 3 of those are a bit concerning.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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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