The Market Doesn't Like What It Sees From System1, Inc.'s (NYSE:SST) Revenues Yet As Shares Tumble 31%

System1, Inc. (NYSE:SST) shareholders that were waiting for something to happen have been dealt a blow with a 31% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 57% share price decline.

After such a large drop in price, System1's price-to-sales (or "P/S") ratio of 0.2x might make it look like a buy right now compared to the Interactive Media and Services industry in the United States, where around half of the companies have P/S ratios above 1.7x and even P/S above 4x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for System1

What Does System1's Recent Performance Look Like?

While the industry has experienced revenue growth lately, System1's revenue has gone into reverse gear, which is not great. 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 System1's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Revenue Growth Forecasted For System1?

There's an inherent assumption that a company should underperform the industry for P/S ratios like System1's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 40% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 16% in aggregate. 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 dual analysts covering the company suggest revenue should grow by 0.8% over the next year. That's shaping up to be materially lower than the 14% growth forecast for the broader industry.

With this information, we can see why System1 is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From System1's P/S?

The southerly movements of System1's shares means its P/S is now sitting at a pretty low level. 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 System1 maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.

Plus, you should also learn about these 2 warning signs we've spotted with System1 (including 1 which is a bit concerning).

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.

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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.