Direct Digital Holdings, Inc. (NASDAQ:DRCT) Might Not Be As Mispriced As It Looks After Plunging 39%

To the annoyance of some shareholders, Direct Digital Holdings, Inc. (NASDAQ:DRCT) shares are down a considerable 39% 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 85% share price decline.

After such a large drop in price, Direct Digital Holdings may be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.1x, considering almost half of all companies in the Media industry in the United States have P/S ratios greater than 1.1x 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.

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Check out our latest analysis for Direct Digital Holdings

What Does Direct Digital Holdings' P/S Mean For Shareholders?

Direct Digital Holdings could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Keen to find out how analysts think Direct Digital Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Direct Digital Holdings' Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 62% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 51% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 38% over the next year. With the industry only predicted to deliver 3.0%, the company is positioned for a stronger revenue result.

With this in consideration, we find it intriguing that Direct Digital Holdings' P/S sits behind most of its industry peers. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Direct Digital Holdings' P/S has taken a dip along with its share price. 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.

To us, it seems Direct Digital Holdings currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

And what about other risks? Every company has them, and we've spotted 6 warning signs for Direct Digital Holdings you should know about.

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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.