Investors Don't See Light At End Of 3-D Matrix, Ltd.'s (TSE:7777) Tunnel And Push Stock Down 32%

To the annoyance of some shareholders, 3-D Matrix, Ltd. (TSE:7777) shares are down a considerable 32% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 20% in that time.

Following the heavy fall in price, 3-D Matrix's price-to-sales (or "P/S") ratio of 1.7x might make it look like a strong buy right now compared to the wider Biotechs industry in Japan, where around half of the companies have P/S ratios above 21.4x and even P/S above 74x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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View our latest analysis for 3-D Matrix

What Does 3-D Matrix's P/S Mean For Shareholders?

Recent times have been quite advantageous for 3-D Matrix as its revenue has been rising very briskly. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. Those who are bullish on 3-D Matrix will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Although there are no analyst estimates available for 3-D Matrix, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

3-D Matrix's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 78% last year. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 90% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why 3-D Matrix is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What Does 3-D Matrix's P/S Mean For Investors?

Shares in 3-D Matrix have plummeted and its P/S has followed suit. 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.

In line with expectations, 3-D Matrix maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 4 warning signs for 3-D Matrix you should be aware of, and 3 of them can't be ignored.

If these risks are making you reconsider your opinion on 3-D Matrix, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.