Some Shareholders Feeling Restless Over DoubleDown Interactive Co., Ltd.'s (NASDAQ:DDI) P/S Ratio
It's not a stretch to say that DoubleDown Interactive Co., Ltd.'s (NASDAQ:DDI) price-to-sales (or "P/S") ratio of 1.2x right now seems quite "middle-of-the-road" for companies in 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.
View our latest analysis for DoubleDown Interactive
How Has DoubleDown Interactive Performed Recently?
DoubleDown Interactive could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
Want the full picture on analyst estimates for the company? Then our free report on DoubleDown Interactive will help you uncover what's on the horizon.
Do Revenue Forecasts Match The P/S Ratio?
There's an inherent assumption that a company should be matching the industry for P/S ratios like DoubleDown Interactive's to be considered reasonable.
Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Still, the latest three year period has seen an excellent 31% overall rise in revenue, in spite of its uninspiring short-term performance. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.
Turning to the outlook, the next three years should generate growth of 3.2% per annum as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 10% per annum growth forecast for the broader industry.
With this in mind, we find it intriguing that DoubleDown Interactive's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.
The Key Takeaway
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.
Our look at the analysts forecasts of DoubleDown Interactive's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.
Before you take the next step, you should know about the 1 warning sign for DoubleDown Interactive that we have uncovered.
If you're unsure about the strength of DoubleDown Interactive's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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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