PDF Solutions, Inc.'s (NASDAQ:PDFS) Price Is Out Of Tune With Revenues

PDF Solutions, Inc.'s (NASDAQ:PDFS) price-to-sales (or "P/S") ratio of 3.8x may not look like an appealing investment opportunity when you consider close to half the companies in the Semiconductor industry in the United States have P/S ratios below 2.9x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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See our latest analysis for PDF Solutions

How Has PDF Solutions Performed Recently?

Recent times haven't been great for PDF Solutions as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. If not, then existing shareholders may be very nervous about the viability of the share price.

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

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

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

If we review the last year of revenue growth, the company posted a worthy increase of 8.2%. Pleasingly, revenue has also lifted 62% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 20% as estimated by the only analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 36%, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that PDF Solutions' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 growth outlook.

What We Can Learn From PDF Solutions' P/S?

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for PDF Solutions, this doesn't appear to be impacting the P/S in the slightest. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for PDF Solutions with six simple checks on some of these key factors.

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.