Smith Micro Software, Inc. (NASDAQ:SMSI) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground.    But the last month did very little to improve the 72% share price decline over the last year.  

In spite of the firm bounce in price, Smith Micro Software's price-to-sales (or "P/S") ratio of 0.7x might still make it look like a strong buy right now compared to the wider Software industry in the United States, where around half of the companies have P/S ratios above 4.4x and even P/S above 11x are quite common.   Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.  

NasdaqCM:SMSI Price to Sales Ratio vs Industry May 14th 2024

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

Smith Micro Software could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth.   Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon.  So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.    

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Smith Micro Software.

Do Revenue Forecasts Match The Low P/S Ratio?  

The only time you'd be truly comfortable seeing a P/S as depressed as Smith Micro Software's is when the company's growth is on track to lag the industry decidedly.  

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 24%.   The last three years don't look nice either as the company has shrunk revenue by 28% in aggregate.  Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.  

Looking ahead now, revenue is anticipated to climb by 25% per annum during the coming three years according to the three analysts following the company.  Meanwhile, the rest of the industry is forecast to only expand by 15% per annum, which is noticeably less attractive.

With this in consideration, we find it intriguing that Smith Micro Software's P/S sits behind most of its industry peers.  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?

Even after such a strong price move, Smith Micro Software's P/S still trails the rest of the industry.      Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

To us, it seems Smith Micro Software currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry.  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.    

You always need to take note of risks, for example - Smith Micro Software has 3 warning signs  we think you should be aware of.  

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.