Unpleasant Surprises Could Be In Store For MeridianLink, Inc.'s (NYSE:MLNK) Shares
With a median price-to-sales (or "P/S") ratio of close to 4.4x in the Software industry in the United States, you could be forgiven for feeling indifferent about MeridianLink, Inc.'s (NYSE:MLNK) P/S ratio of 4.5x. 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.
See our latest analysis for MeridianLink
What Does MeridianLink's Recent Performance Look Like?
Recent times haven't been great for MeridianLink as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying to much for the stock.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on MeridianLink.
What Are Revenue Growth Metrics Telling Us About The P/S?
MeridianLink's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 7.6% last year. Pleasingly, revenue has also lifted 89% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.
Turning to the outlook, the next three years should generate growth of 9.6% per annum as estimated by the six analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 13% per annum, which is noticeably more attractive.
In light of this, it's curious that MeridianLink's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.
What Does MeridianLink's P/S Mean For Investors?
It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our look at the analysts forecasts of MeridianLink'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. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.
There are also other vital risk factors to consider and we've discovered 2 warning signs for MeridianLink (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
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).
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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