Sweetgreen, Inc. (NYSE:SG) Looks Inexpensive After Falling 28% But Perhaps Not Attractive Enough

To the annoyance of some shareholders, Sweetgreen, Inc. (NYSE:SG) shares are down a considerable 28% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 86% share price decline.

After such a large drop in price, Sweetgreen may be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.9x, considering almost half of all companies in the Hospitality industry in the United States have P/S ratios greater than 1.6x and even P/S higher than 4x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

View our latest analysis for Sweetgreen

What Does Sweetgreen's P/S Mean For Shareholders?

Sweetgreen could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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

What Are Revenue Growth Metrics Telling Us About The Low P/S?

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

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Still, the latest three year period has seen an excellent 53% overall rise in revenue, in spite of its uninspiring short-term performance. Accordingly, shareholders will be pleased, but also have some questions to ponder about the last 12 months.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 8.2% each year over the next three years. That's shaping up to be materially lower than the 14% per annum growth forecast for the broader industry.

With this information, we can see why Sweetgreen is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Sweetgreen's P/S

The southerly movements of Sweetgreen's shares means its P/S is now sitting at a pretty low level. 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.

As expected, our analysis of Sweetgreen's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor 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. The company will need a change of fortune to justify the P/S rising higher in the future.

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

If these risks are making you reconsider your opinion on Sweetgreen, 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.