Optimistic Investors Push ContextLogic Inc. (NASDAQ:WISH) Shares Up 53% But Growth Is Lacking

ContextLogic Inc. (NASDAQ:WISH) shares have had a really impressive month, gaining 53% after a shaky period beforehand. But the last month did very little to improve the 53% share price decline over the last year.

In spite of the firm bounce in price, it's still not a stretch to say that ContextLogic's price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Multiline Retail industry in the United States, where the median P/S ratio is around 0.9x. 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 Has ContextLogic Performed Recently?

ContextLogic could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Do Revenue Forecasts Match The P/S Ratio?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 50%. As a result, revenue from three years ago have also fallen 89% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue growth is heading into negative territory, declining 26% over the next year. With the industry predicted to deliver 14% growth, that's a disappointing outcome.

In light of this, it's somewhat alarming that ContextLogic's P/S sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

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

ContextLogic appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

While ContextLogic's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

Before you settle on your opinion, we've discovered 4 warning signs for ContextLogic (1 can't be ignored!) that you should be aware 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.