Don't Nod Entertainment S.A.'s (EPA:ALDNE) Popularity With Investors Under Threat As Stock Sinks 25%

Unfortunately for some shareholders, the Don't Nod Entertainment S.A. (EPA:ALDNE) share price has dived 25% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 66% loss during that time.

Even after such a large drop in price, there still wouldn't be many who think Don't Nod Entertainment's price-to-sales (or "P/S") ratio of 1.4x is worth a mention when it essentially matches the median P/S in France's Entertainment industry. 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.

Check out our latest analysis for Don't Nod Entertainment

What Does Don't Nod Entertainment's P/S Mean For Shareholders?

Recent times haven't been great for Don't Nod Entertainment as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

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.

Is There Some Revenue Growth Forecasted For Don't Nod Entertainment?

In order to justify its P/S ratio, Don't Nod Entertainment would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 9.7% gain to the company's revenues. Pleasingly, revenue has also lifted 59% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to plummet, contracting by 53% during the coming year according to the three analysts following the company. Meanwhile, the broader industry is forecast to moderate by 5.7%, which indicates the company should perform poorly indeed.

In light of this, it's somewhat peculiar that Don't Nod Entertainment's P/S sits in line with the majority of other companies. With revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. Maintaining these prices will be difficult to achieve as the weak outlook is likely to weigh down the shares eventually.

The Final Word

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

Don't Nod Entertainment's analyst forecasts have revealed that its even shakier outlook against the industry isn't impacting its P/S as much as we would have predicted. Even though the company's P/S is on par with the rest of the industry, the fact that it's revenue outlook is poorer than an already struggling industry suggests that the P/S isn't justified. We also have our reservations about the company's ability to sustain this level of performance amidst the challenging industry conditions. This presents a risk to investors if the P/S were to decline to a level that more accurately reflects the company's revenue prospects.

Plus, you should also learn about these 2 warning signs we've spotted with Don't Nod Entertainment (including 1 which makes us a bit uncomfortable).

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.