Datasection Inc.'s (TSE:3905) Stock Retreats 38% But Revenues Haven't Escaped The Attention Of Investors

Unfortunately for some shareholders, the Datasection Inc. (TSE:3905) share price has dived 38% in the last thirty days, prolonging recent pain. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 254% in the last twelve months.

Even after such a large drop in price, when almost half of the companies in Japan's Software industry have price-to-sales ratios (or "P/S") below 1.8x, you may still consider Datasection as a stock not worth researching with its 9.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Datasection

What Does Datasection's Recent Performance Look Like?

Revenue has risen firmly for Datasection recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Datasection will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Datasection?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Datasection's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 16%. The latest three year period has also seen an excellent 60% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 13% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Datasection's P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

Even after such a strong price drop, Datasection's P/S still exceeds the industry median significantly. 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.

As we suspected, our examination of Datasection revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 3 warning signs for Datasection (2 are a bit unpleasant!) that you need to take into consideration.

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

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

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