CEVA, Inc.'s (NASDAQ:CEVA) 31% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, CEVA, Inc. (NASDAQ:CEVA) shares have been powering on, with a gain of 31% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 44% in the last year.

After such a large jump in price, CEVA may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 7.2x, since almost half of all companies in the Semiconductor industry in the United States have P/S ratios under 4x and even P/S lower than 1.7x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for CEVA

How CEVA Has Been Performing

While the industry has experienced revenue growth lately, CEVA's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is CEVA's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 1.7% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 13% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 10% as estimated by the five analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 40%, which is noticeably more attractive.

With this information, we find it concerning that CEVA is trading at a P/S higher than the industry. 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 CEVA's P/S Mean For Investors?

The strong share price surge has lead to CEVA's P/S soaring as well. 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 concluded that CEVA currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for CEVA with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of CEVA's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.