Youdao, Inc. (NYSE:DAO) Stock Catapults 26% Though Its Price And Business Still Lag The Industry

Youdao, Inc. (NYSE:DAO) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Even after such a large jump in price, it would still be understandable if you think Youdao is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.6x, considering almost half the companies in the United States' Consumer Services industry have P/S ratios above 1.5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Youdao

How Has Youdao Performed Recently?

With revenue growth that's inferior to most other companies of late, Youdao has been relatively sluggish. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Youdao will help you uncover what's on the horizon.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Youdao's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 9.7% last year. The solid recent performance means it was also able to grow revenue by 24% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 11% over the next year. That's shaping up to be materially lower than the 14% growth forecast for the broader industry.

With this in consideration, its clear as to why Youdao's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Youdao's P/S?

Youdao's stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of Youdao's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Youdao you should be aware of.

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.