Even With A 25% Surge, Cautious Investors Are Not Rewarding Sezzle Inc.'s (ASX:SZL) Performance Completely

Those holding Sezzle Inc. (ASX:SZL) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Even after such a large jump in price, when close to half the companies operating in Australia's Diversified Financial industry have price-to-sales ratios (or "P/S") above 1.4x, you may still consider Sezzle as an enticing stock to check out with its 0.5x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Sezzle

What Does Sezzle's Recent Performance Look Like?

Sezzle certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. One possibility is that the P/S ratio is low because investors think the company's revenue is going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Sezzle will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

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

If we review the last year of revenue growth, the company posted a terrific increase of 24%. The strong recent performance means it was also able to grow revenue by 250% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 4.0% per annum as estimated by the dual analysts watching the company. With the rest of the industry predicted to shrink by 14% per year, it's still an optimal result.

With this information, it's perhaps strange but not a major surprise that Sezzle is trading at a lower P/S in comparison. With revenue going in reverse, it's not guaranteed that the P/S has found a floor yet. There's still potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Sezzle's stock price has surged recently, but its but its P/S still remains modest. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Sezzle currently trades on a much lower than expected P/S since its revenue forecast is not as bad as the struggling industry. There could be some major unobserved threats to revenue preventing the P/S ratio from matching the more attractive outlook. Amidst challenging industry conditions, a key concern is whether the company can sustain its superior revenue growth trajectory. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

There are also other vital risk factors to consider and we've discovered 5 warning signs for Sezzle (3 are significant!) that you should be aware of before investing here.

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).

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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.