Revenues Not Telling The Story For Ubisoft Entertainment SA (EPA:UBI) After Shares Rise 31%

Ubisoft Entertainment SA (EPA:UBI) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 49% over that time.

Even after such a large jump in price, it's still not a stretch to say that Ubisoft Entertainment's price-to-sales (or "P/S") ratio of 0.8x right now seems quite "middle-of-the-road" compared to the Entertainment industry in France, where the median P/S ratio is around 0.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Ubisoft Entertainment

What Does Ubisoft Entertainment's P/S Mean For Shareholders?

Recent times haven't been great for Ubisoft 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Is There Some Revenue Growth Forecasted For Ubisoft Entertainment?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Ubisoft Entertainment's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 27%. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 0.5% per annum as estimated by the analysts watching the company. That's shaping up to be materially lower than the 6.8% per year growth forecast for the broader industry.

With this in mind, we find it intriguing that Ubisoft Entertainment's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Ubisoft Entertainment's P/S Mean For Investors?

Its shares have lifted substantially and now Ubisoft Entertainment's P/S is back within range of the industry median. 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.

Given that Ubisoft Entertainment's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Ubisoft Entertainment (of which 2 are concerning!) you should know about.

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.