You may think that with a price-to-sales (or "P/S") ratio of 0.9x SMART Global Holdings, Inc. (NASDAQ:SGH) is definitely a stock worth checking out, seeing as almost half of all the Semiconductor companies in the United States have P/S ratios greater than 4.2x and even P/S above 9x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for SMART Global Holdings

How Has SMART Global Holdings Performed Recently?

Recent times haven't been great for SMART Global Holdings as its revenue has been rising slower than most other companies. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Is There Any Revenue Growth Forecasted For SMART Global Holdings?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like SMART Global Holdings' to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Fortunately, a few good years before that means that it was still able to grow revenue by 16% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 2.8% as estimated by the five analysts watching the company. Meanwhile, the broader industry is forecast to expand by 43%, which paints a poor picture.

In light of this, it's understandable that SMART Global Holdings' 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 the weak outlook is weighing down the shares.

What Does SMART Global Holdings' P/S Mean For Investors?

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.

As we suspected, our examination of SMART Global Holdings' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Having said that, be aware SMART Global Holdings is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.

If these risks are making you reconsider your opinion on SMART Global Holdings, 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.