Why We're Not Concerned Yet About Datasection Inc.'s (TSE:3905) 29% Share Price Plunge

Unfortunately for some shareholders, the Datasection Inc. (TSE:3905) share price has dived 29% 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 206% in the last twelve months.

Although its price has dipped substantially, you could still be forgiven for thinking Datasection is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.7x, considering almost half the companies in Japan's Software industry have P/S ratios below 2x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Datasection

What Does Datasection's Recent Performance Look Like?

The revenue growth achieved at Datasection over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Datasection's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Datasection's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 28% last year. The strong recent performance means it was also able to grow revenue by 81% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

When compared to the industry's one-year growth forecast of 12%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we can see why Datasection is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

Datasection's shares may have suffered, but its P/S remains high. 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.

It's no surprise that Datasection can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

You should always think about risks. Case in point, we've spotted 4 warning signs for Datasection you should be aware of, and 2 of them are a bit concerning.

If you're unsure about the strength of Datasection's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.