To the annoyance of some shareholders, Chegg, Inc. (NYSE:CHGG) shares are down a considerable 27% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 48% share price drop.

Even after such a large drop in price, it would still be understandable if you think Chegg is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.8x, considering almost half the companies in the United States' Consumer Services industry have P/S ratios above 1.5x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

How Chegg Has Been Performing

Chegg could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

How Is Chegg's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Chegg's is when the company's growth is on track to lag the industry.

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 6.5%. This means it has also seen a slide in revenue over the longer-term as revenue is down 1.1% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue growth is heading into negative territory, declining 7.2% over the next year. Meanwhile, the broader industry is forecast to expand by 16%, which paints a poor picture.

With this in consideration, we find it intriguing that Chegg'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.

What Does Chegg's P/S Mean For Investors?

Chegg's P/S has taken a dip along with its share price. 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.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Chegg's P/S is on the lower end of the spectrum. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 3 warning signs for Chegg (1 is a bit concerning!) that we have uncovered.

If you're unsure about the strength of Chegg'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.