More Unpleasant Surprises Could Be In Store For Ambarella, Inc.'s (NASDAQ:AMBA) Shares After Tumbling 25%

To the annoyance of some shareholders, Ambarella, Inc. (NASDAQ:AMBA) shares are down a considerable 25% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 12% share price drop.

Even after such a large drop in price, given around half the companies in the United States' Semiconductor industry have price-to-sales ratios (or "P/S") below 2.7x, you may still consider Ambarella as a stock to avoid entirely with its 6.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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View our latest analysis for Ambarella

How Has Ambarella Performed Recently?

With revenue growth that's inferior to most other companies of late, Ambarella has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. If not, then existing shareholders may be very 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 Ambarella .

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

In order to justify its P/S ratio, Ambarella would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 26% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 14% drop in revenue 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 analysts covering the company suggest revenue should grow by 18% each year over the next three years. With the industry predicted to deliver 24% growth per year, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Ambarella's P/S is outpacing its industry peers. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Ambarella's P/S Mean For Investors?

Ambarella's shares may have suffered, but its P/S remains high. 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.

We've concluded that Ambarella currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Ambarella 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.