Not Many Are Piling Into Spectra7 Microsystems Inc. (CVE:SEV) Stock Yet As It Plummets 37%

Spectra7 Microsystems Inc. (CVE:SEV) shares have had a horrible month, losing 37% after a relatively good period beforehand. Longer-term shareholders would now have taken a real hit with the stock declining 3.6% in the last year.

After such a large drop in price, Spectra7 Microsystems' price-to-sales (or "P/S") ratio of 1x might make it look like a strong buy right now compared to the wider Semiconductor industry in Canada, where around half of the companies have P/S ratios above 4.4x and even P/S above 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

View our latest analysis for Spectra7 Microsystems

What Does Spectra7 Microsystems' Recent Performance Look Like?

The revenue growth achieved at Spectra7 Microsystems over the last year would be more than acceptable for most companies. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Spectra7 Microsystems will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Spectra7 Microsystems' earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as Spectra7 Microsystems' is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered an exceptional 15% gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 40% shows it's noticeably more attractive.

With this in mind, we find it intriguing that Spectra7 Microsystems' P/S isn't as high compared to that of its industry peers. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Spectra7 Microsystems' P/S

Having almost fallen off a cliff, Spectra7 Microsystems' share price has pulled its P/S way down as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We're very surprised to see Spectra7 Microsystems currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Spectra7 Microsystems (of which 1 is significant!) you should know about.

If you're unsure about the strength of Spectra7 Microsystems' 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.