The Smith Micro Software, Inc. (NASDAQ:SMSI) share price has fared very poorly over the last month, falling by a substantial 27%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 81% loss during that time.

Since its price has dipped substantially, Smith Micro Software may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.6x, considering almost half of all companies in the Software industry in the United States have P/S ratios greater than 4.1x and even P/S higher than 11x 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 highly reduced P/S.

What Does Smith Micro Software's Recent Performance Look Like?

Smith Micro Software hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Do Revenue Forecasts Match The Low P/S Ratio?

Smith Micro Software's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than 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 31%. As a result, revenue from three years ago have also fallen 42% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 22% per annum over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 18% per year, which is noticeably less attractive.

In light of this, it's peculiar that Smith Micro Software's P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What Does Smith Micro Software's P/S Mean For Investors?

Smith Micro Software's P/S looks about as weak as its stock price lately. 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.

A look at Smith Micro Software's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. There could be some major risk factors that are placing downward pressure on the P/S ratio. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Smith Micro Software that you should be aware of.

If these risks are making you reconsider your opinion on Smith Micro Software, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com