The Cerence Inc. (NASDAQ:CRNC) share price has fared very poorly over the last month, falling by a substantial 56%. For any long-term shareholders, the last month ends a year to forget by locking in a 73% share price decline.
Since its price has dipped substantially, Cerence may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.8x, since almost half of all companies in the Software industry in the United States have P/S ratios greater than 4.4x and even P/S higher than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.
NasdaqGS:CRNC Price to Sales Ratio vs Industry May 10th 2024
What Does Cerence's P/S Mean For Shareholders?
Recent revenue growth for Cerence has been in line with the industry. One possibility is that the P/S ratio is low because investors think this modest revenue performance may begin to slide. Those who are bullish on Cerence will be hoping that this isn't the case.
Keen to find out how analysts think Cerence's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Cerence's Revenue Growth Trending?
There's an inherent assumption that a company should far underperform the industry for P/S ratios like Cerence's to be considered reasonable.
Taking a look back first, we see that the company grew revenue by an impressive 16% last year. Still, revenue has fallen 2.8% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Turning to the outlook, the next three years should generate growth of 5.0% per year as estimated by the nine analysts watching the company. That's shaping up to be materially lower than the 15% per year growth forecast for the broader industry.
With this in consideration, its clear as to why Cerence's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
Having almost fallen off a cliff, Cerence's share price has pulled its P/S way down as well. 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.
We've established that Cerence maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.
We don't want to rain on the parade too much, but we did also find 3 warning signs for Cerence that you need to be mindful of.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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