You may think that with a price-to-sales (or "P/S") ratio of 1.2x Core Scientific, Inc. (NASDAQ:CORZ) is a stock worth checking out, seeing as almost half of all the IT companies in the United States have P/S ratios greater than 1.7x and even P/S higher than 4x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Core Scientific's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Core Scientific's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Core Scientific's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 22% decrease to the company's top line. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. Therefore, it's fair to say the revenue growth recently has been superb for the company, but investors will want to ask why it is now in decline.

Looking ahead now, revenue is anticipated to slump, contracting by 1.9% during the coming year according to the four analysts following the company. Meanwhile, the broader industry is forecast to expand by 9.1%, which paints a poor picture.

With this in consideration, we find it intriguing that Core Scientific's P/S is closely matching its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Core Scientific's P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Core Scientific's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Core Scientific's poor outlook justifies its low P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Before you take the next step, you should know about the 2 warning signs for Core Scientific (1 doesn't sit too well with us!) that we have uncovered.

If these risks are making you reconsider your opinion on Core Scientific, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.