Don't Nod Entertainment S.A.'s (EPA:ALDNE) Popularity With Investors Under Threat As Stock Sinks 27%

Don't Nod Entertainment S.A. (EPA:ALDNE) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 78% loss during that time.

Although its price has dipped substantially, it's still not a stretch to say that Don't Nod Entertainment's price-to-sales (or "P/S") ratio of 0.6x right now seems quite "middle-of-the-road" compared to the Entertainment industry in France, where the median P/S ratio is around 1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Don't Nod Entertainment

How Don't Nod Entertainment Has Been Performing

Recent times haven't been great for Don't Nod Entertainment as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Don't Nod Entertainment will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The P/S?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 6.8% last year. The latest three year period has also seen an excellent 36% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to slump, contracting by 15% per year during the coming three years according to the three analysts following the company. That's not great when the rest of the industry is expected to grow by 9.0% per annum.

With this information, we find it concerning that Don't Nod Entertainment is trading at a fairly similar P/S compared to the industry. 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 Don't Nod Entertainment's share price tumble, its P/S is just clinging on to the industry median P/S. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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. 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 the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Don't Nod Entertainment you should be aware of.

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.