The GSI Technology, Inc. (NASDAQ:GSIT) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 45% in that time.
Even after such a large drop in price, you could still be forgiven for feeling indifferent about GSI Technology's P/S ratio of 3.4x, since the median price-to-sales (or "P/S") ratio for the Semiconductor industry in the United States is also close to 4.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
NasdaqGS:GSIT Price to Sales Ratio vs Industry May 14th 2024
How Has GSI Technology Performed Recently?
As an illustration, revenue has deteriorated at GSI Technology over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.
Although there are no analyst estimates available for GSI Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
What Are Revenue Growth Metrics Telling Us About The P/S?
There's an inherent assumption that a company should be matching the industry for P/S ratios like GSI Technology's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 27% decrease to the company's top line. As a result, revenue from three years ago have also fallen 22% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Comparing that to the industry, which is predicted to deliver 47% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.
In light of this, it's somewhat alarming that GSI Technology's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.
What We Can Learn From GSI Technology's P/S?
Following GSI Technology's share price tumble, its P/S is just clinging on to the industry median P/S. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
The fact that GSI Technology currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
We don't want to rain on the parade too much, but we did also find 5 warning signs for GSI Technology (3 are significant!) that you need to be mindful of.
If you're unsure about the strength of GSI Technology'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.