Optimistic Investors Push Nuix Limited (ASX:NXL) Shares Up 29% But Growth Is Lacking

The Nuix Limited (ASX:NXL) share price has done very well over the last month, posting an excellent gain of 29%. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 56% share price drop in the last twelve months.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Nuix's P/S ratio of 4.2x, since the median price-to-sales (or "P/S") ratio for the Software industry in Australia is also close to 3.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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What Does Nuix's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Nuix has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. If not, then existing shareholders may be a little nervous about the viability of the share price.

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How Is Nuix's Revenue Growth Trending?

In order to justify its P/S ratio, Nuix would need to produce growth that's similar to the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. However, a few strong years before that means that it was still able to grow revenue by an impressive 45% in total over the last three years. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

Turning to the outlook, the next three years should generate growth of 11% each year as estimated by the seven analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 49% each year, which is noticeably more attractive.

With this information, we find it interesting that Nuix is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Nuix's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Given that Nuix's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Nuix with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Nuix's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.