Pantaflix AG's (ETR:PAL) 25% Share Price Plunge Could Signal Some Risk

Pantaflix AG (ETR:PAL) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. The good news is that in the last year, the stock has shone bright like a diamond, gaining 186%.

Even after such a large drop in price, it's still not a stretch to say that Pantaflix's price-to-sales (or "P/S") ratio of 1.2x right now seems quite "middle-of-the-road" compared to the Entertainment industry in Germany, where the median P/S ratio is around 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Pantaflix

How Has Pantaflix Performed Recently?

With revenue growth that's superior to most other companies of late, Pantaflix has been doing relatively well. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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

How Is Pantaflix's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 88% last year. 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.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 26% per annum as estimated by the lone analyst watching the company. That's not great when the rest of the industry is expected to grow by 5.7% each year.

In light of this, it's somewhat alarming that Pantaflix's P/S sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Key Takeaway

Following Pantaflix'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.

It appears that Pantaflix currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Pantaflix, and understanding these should be part of your investment process.

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