ContextLogic Inc.'s (NASDAQ:WISH) 37% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

To the annoyance of some shareholders, ContextLogic Inc. (NASDAQ:WISH) shares are down a considerable 37% 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 87% share price decline.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about ContextLogic's P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Multiline Retail industry in the United States is also close to 0.7x. 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.

Check out our latest analysis for ContextLogic

How ContextLogic Has Been Performing

While the industry has experienced revenue growth lately, ContextLogic's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying to much for the stock.

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

How Is ContextLogic's Revenue Growth Trending?

In order to justify its P/S ratio, ContextLogic would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 73% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 70% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 9.7% per annum over the next three years. With the industry predicted to deliver 12% growth each year, the company is positioned for a weaker revenue result.

In light of this, it's curious that ContextLogic's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

With its share price dropping off a cliff, the P/S for ContextLogic looks to be in line with the rest of the Multiline Retail industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given that ContextLogic's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

We don't want to rain on the parade too much, but we did also find 4 warning signs for ContextLogic (1 is concerning!) that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.