Stock Analysis

Dada Nexus Limited (NASDAQ:DADA) Stock's 26% Dive Might Signal An Opportunity But It Requires Some Scrutiny

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Dada Nexus Limited (NASDAQ:DADA) shares have had a horrible month, losing 26% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 67% share price decline.

Even after such a large drop in price, it's still not a stretch to say that Dada Nexus' price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" compared to the Consumer Retailing industry in the United States, seeing as it matches the P/S ratio of the wider industry. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Dada Nexus

NasdaqGS:DADA Price to Sales Ratio vs Industry April 24th 2024

How Has Dada Nexus Performed Recently?

Recent times have been advantageous for Dada Nexus as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

Is There Some Revenue Growth Forecasted For Dada Nexus?

The only time you'd be comfortable seeing a P/S like Dada Nexus' is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company managed to grow revenues by a handy 12% last year. The latest three year period has also seen an excellent 83% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 12% per annum over the next three years. That's shaping up to be materially higher than the 4.7% per year growth forecast for the broader industry.

With this information, we find it interesting that Dada Nexus is trading at a fairly similar P/S compared to the industry. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On Dada Nexus' P/S

Dada Nexus' plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.

We've established that Dada Nexus currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Dada Nexus that you need to be mindful of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Valuation is complex, but we're helping make it simple.

Find out whether Dada Nexus is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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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.