Don't Nod Entertainment S.A. (EPA:ALDNE) May Have Run Too Fast Too Soon With Recent 26% Price Plummet

The Don't Nod Entertainment S.A. (EPA:ALDNE) share price has fared very poorly over the last month, falling by a substantial 26%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 74% loss during that time.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Don't Nod Entertainment's P/S ratio of 0.9x, since the median price-to-sales (or "P/S") ratio for the Entertainment industry in France is also close to 1.1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Don't Nod Entertainment

How Don't Nod Entertainment Has Been Performing

Recent times have been advantageous for Don't Nod Entertainment as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. 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 Don't Nod Entertainment's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Don't Nod Entertainment's Revenue Growth Trending?

Don't Nod Entertainment's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 6.8%. The latest three year period has also seen an excellent 36% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 64% during the coming year according to the three analysts following the company. Meanwhile, the broader industry is forecast to expand by 48%, which paints a poor picture.

With this in consideration, we think it doesn't make sense that Don't Nod Entertainment's P/S is closely matching its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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

Don't Nod Entertainment's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.

Our check of Don't Nod Entertainment's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Don't Nod Entertainment that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com