Why Investors Shouldn't Be Surprised By Hydrofarm Holdings Group, Inc.'s (NASDAQ:HYFM) Low P/S
Hydrofarm Holdings Group, Inc.'s (NASDAQ:HYFM) price-to-sales (or "P/S") ratio of 0.2x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Machinery industry in the United States have P/S ratios greater than 1.6x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.
See our latest analysis for Hydrofarm Holdings Group
How Hydrofarm Holdings Group Has Been Performing
While the industry has experienced revenue growth lately, Hydrofarm Holdings Group's revenue has gone into reverse gear, which is not great. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.
Keen to find out how analysts think Hydrofarm Holdings Group's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Hydrofarm Holdings Group's Revenue Growth Trending?
Hydrofarm Holdings Group's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 38%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 22% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.
Looking ahead now, revenue is anticipated to slump, contracting by 1.0% during the coming year according to the four analysts following the company. With the industry predicted to deliver 12% growth, that's a disappointing outcome.
With this information, we are not surprised that Hydrofarm Holdings Group is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Bottom Line On Hydrofarm Holdings Group's P/S
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.
As we suspected, our examination of Hydrofarm Holdings Group's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Before you take the next step, you should know about the 3 warning signs for Hydrofarm Holdings Group that we have uncovered.
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.
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