Little Excitement Around MicroAlgo Inc.'s (NASDAQ:MLGO) Revenues
MicroAlgo Inc. (NASDAQ:MLGO) has a price-to-sales (P/S) ratio of 1.9x, lower than the industry average of 2.7x, indicating potential investor concerns about its revenue performance. The company has experienced a 28% revenue decline over the past year and a total drop of 34% over three years, contrasting with the industry's expected growth of 22%. This shrinking revenue is likely contributing to its low P/S ratio, and unless conditions improve, the share price may struggle to rise. Investors should be aware of two warning signs associated with the company.
With a price-to-sales (or "P/S") ratio of 1.9x MicroAlgo Inc. (NASDAQ:MLGO) may be sending bullish signals at the moment, given that almost half of all the IT companies in the United States have P/S ratios greater than 2.7x and even P/S higher than 9x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.
AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.
Check out our latest analysis for MicroAlgo
How Has MicroAlgo Performed Recently?
For instance, MicroAlgo's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
Although there are no analyst estimates available for MicroAlgo, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Do Revenue Forecasts Match The Low P/S Ratio?
In order to justify its P/S ratio, MicroAlgo would need to produce sluggish growth that's trailing the industry.
Retrospectively, the last year delivered a frustrating 28% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 34% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
In contrast to the company, the rest of the industry is expected to grow by 22% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
In light of this, it's understandable that MicroAlgo's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.
What We Can Learn From MicroAlgo'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 MicroAlgo revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
And what about other risks? Every company has them, and we've spotted 2 warning signs for MicroAlgo you should know about.
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).
