Coveo Solutions Inc.'s (TSE:CVO) Popularity With Investors Under Threat As Stock Sinks 27%

The Coveo Solutions Inc. (TSE:CVO) share price has fared very poorly over the last month, falling by a substantial 27%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 45% in that time.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Coveo Solutions' P/S ratio of 3.3x, since the median price-to-sales (or "P/S") ratio for the Software industry in Canada is about the same. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Coveo Solutions

What Does Coveo Solutions' P/S Mean For Shareholders?

Coveo Solutions could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Coveo Solutions' Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 13% last year. This was backed up an excellent period prior to see revenue up by 94% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue should grow by 10% per year over the next three years. That's shaping up to be materially lower than the 19% per year growth forecast for the broader industry.

With this in mind, we find it intriguing that Coveo Solutions' P/S is closely matching its industry peers. 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 Final Word

Coveo Solutions' plummeting stock price has brought its P/S back to a similar region as the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

When you consider that Coveo Solutions' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be 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. A positive change is needed in order to justify the current price-to-sales ratio.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Coveo Solutions that you should be aware of.

If you're unsure about the strength of Coveo Solutions' 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.