To the annoyance of some shareholders, ARB IOT Group Limited (NASDAQ:ARBB) shares are down a considerable 29% in the last month, which continues a horrid run for the company. Longer-term shareholders will rue the drop in the share price, since it’s now virtually flat for the year after a promising few quarters.
After such a large drop in price, ARB IOT Group may be sending buy signals at present with its price-to-sales (or “P/S”) ratio of 0.4x, considering almost half of all companies in the IT industry in the United States have P/S ratios greater than 1.9x and even P/S higher than 5x 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 reduced P/S.
How Has ARB IOT Group Performed Recently?
ARB IOT Group 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. The P/S ratio is probably low because investors think this poor revenue performance isn’t going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.
Keen to find out how analysts think ARB IOT Group’s future stacks up against the industry? In that case, our free report is a great place to start.
Is There Any Revenue Growth Forecasted For ARB IOT Group?
The only time you’d be truly comfortable seeing a P/S as low as ARB IOT Group’s is when the company’s growth is on track to lag the industry.
In reviewing the last year of financials, we were disheartened to see the company’s revenues fell to the tune of 45%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, despite the drawbacks experienced in the last 12 months. Therefore, it’s fair to say the revenue growth recently has been superb for the company, but investors will want to ask why it is now in decline.
Looking ahead now, revenue is anticipated to slump, contracting by 17% during the coming year according to the only analyst following the company. With the industry predicted to deliver 11% growth, that’s a disappointing outcome.
With this in consideration, we find it intriguing that ARB IOT Group’s P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There’s potential for the P/S to fall to even lower levels if the company doesn’t improve its top-line growth.
The Key Takeaway
ARB IOT Group’s recently weak share price has pulled its P/S back below other IT companies. 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.
With revenue forecasts that are inferior to the rest of the industry, it’s no surprise that ARB IOT Group’s P/S is on the lower end of the spectrum. Right now shareholders are accepting the low P/S as they concede future revenue probably won’t provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 4 warning signs with ARB IOT Group (at least 1 which shouldn’t be ignored), and understanding these should be part of your investment process.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
What are the risks and opportunities for ARB IOT Group?
Trading at 68.2% below our estimate of its fair value
Earnings are forecast to decline by an average of 40.7% per year for the next 3 years
Does not have a meaningful market cap ($22M)
Profit margins (10.7%) are lower than last year (16.6%)
Volatile share price over the past 3 months
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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.