Kunlun Tech Co., Ltd. (SZSE:300418) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely

Kunlun Tech Co., Ltd. (SZSE:300418) shares have had a horrible month, losing 26% after a relatively good period beforehand. Indeed, the recent drop has reduced its annual gain to a relatively sedate 6.9% over the last twelve months.

Although its price has dipped substantially, it's still not a stretch to say that Kunlun Tech's price-to-sales (or "P/S") ratio of 8.6x right now seems quite "middle-of-the-road" compared to the Interactive Media and Services industry in China, where the median P/S ratio is around 7.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Kunlun Tech

How Kunlun Tech Has Been Performing

There hasn't been much to differentiate Kunlun Tech's and the industry's revenue growth lately. It seems that many are expecting the mediocre revenue performance to persist, which has held the P/S ratio back. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

Keen to find out how analysts think Kunlun Tech's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Kunlun Tech's Revenue Growth Trending?

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

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Regardless, revenue has managed to lift by a handy 9.7% in aggregate from three years ago, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 15% over the next year. That's shaping up to be materially lower than the 18% growth forecast for the broader industry.

With this information, we find it interesting that Kunlun Tech 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. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Kunlun Tech's P/S Mean For Investors?

Following Kunlun Tech's share price tumble, its P/S is just clinging on to the industry median P/S. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look at the analysts forecasts of Kunlun Tech's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Kunlun Tech (1 doesn't sit too well with us!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Kunlun Tech, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.