Northern Data AG's (FRA:NB2) Share Price Is Still Matching Investor Opinion Despite 37% Slump

To the annoyance of some shareholders, Northern Data AG (FRA:NB2) shares are down a considerable 37% in the last month, which continues a horrid run for the company. Longer-term shareholders would now have taken a real hit with the stock declining 10.0% in the last year.

Although its price has dipped substantially, when almost half of the companies in Germany's Software industry have price-to-sales ratios (or "P/S") below 2.3x, you may still consider Northern Data as a stock not worth researching with its 5.8x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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See our latest analysis for Northern Data

What Does Northern Data's P/S Mean For Shareholders?

Northern Data certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Northern Data.

How Is Northern Data's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Northern Data's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 244% gain to the company's top line. The latest three year period has also seen an excellent 41% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 32% per year over the next three years. That's shaping up to be materially higher than the 13% per year growth forecast for the broader industry.

With this in mind, it's not hard to understand why Northern Data's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Northern Data's P/S Mean For Investors?

Northern Data's shares may have suffered, but its P/S remains high. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Northern Data maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - Northern Data has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.