CloudWalk Technology Co., Ltd. (SHSE:688327) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely

CloudWalk Technology Co., Ltd. (SHSE:688327) shares have had a horrible month, losing 26% after a relatively good period beforehand. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 65% loss during that time.

Even after such a large drop in price, CloudWalk Technology's price-to-sales (or "P/S") ratio of 18.2x might still make it look like a strong sell right now compared to other companies in the Software industry in China, where around half of the companies have P/S ratios below 4.6x and even P/S below 2x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for CloudWalk Technology

How CloudWalk Technology Has Been Performing

CloudWalk Technology has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 CloudWalk Technology's earnings, revenue and cash flow.

How Is CloudWalk Technology's Revenue Growth Trending?

In order to justify its P/S ratio, CloudWalk Technology would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 19% last year. Still, revenue has fallen 17% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 28% shows it's an unpleasant look.

With this in mind, we find it worrying that CloudWalk Technology's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

CloudWalk Technology's shares may have suffered, but its P/S remains high. 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.

Our examination of CloudWalk Technology revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 2 warning signs for CloudWalk Technology (1 is significant!) that we have uncovered.

If these risks are making you reconsider your opinion on CloudWalk Technology, 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.