The Price Is Right For AI inside Inc. (TSE:4488) Even After Diving 26%

AI inside Inc. (TSE:4488) shares have had a horrible month, losing 26% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 46%, which is great even in a bull market.

Even after such a large drop in price, given around half the companies in Japan's Software industry have price-to-sales ratios (or "P/S") below 2.2x, you may still consider AI inside as a stock to avoid entirely with its 6.2x 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.

See our latest analysis for AI inside

How AI inside Has Been Performing

There hasn't been much to differentiate AI inside's and the industry's revenue growth lately. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For AI inside?

In order to justify its P/S ratio, AI inside would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 15% gain to the company's revenues. Revenue has also lifted 8.7% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next year should generate growth of 20% as estimated by the sole analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 15%, which is noticeably less attractive.

With this in mind, it's not hard to understand why AI inside's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does AI inside's P/S Mean For Investors?

AI inside's shares may have suffered, but its P/S remains high. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of AI inside's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with AI inside (including 1 which is a bit unpleasant).

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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.