Improved Revenues Required Before SMART Global Holdings, Inc. (NASDAQ:SGH) Stock's 34% Jump Looks Justified

SMART Global Holdings, Inc. (NASDAQ:SGH) shares have continued their recent momentum with a 34% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 8.2% isn't as impressive.

Although its price has surged higher, SMART Global Holdings may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.3x, since almost half of all companies in the Semiconductor industry in the United States have P/S ratios greater than 4.6x and even P/S higher than 12x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for SMART Global Holdings

What Does SMART Global Holdings' P/S Mean For Shareholders?

SMART Global Holdings hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like SMART Global Holdings' to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.3%. The last three years don't look nice either as the company has shrunk revenue by 12% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 16% as estimated by the four analysts watching the company. With the industry predicted to deliver 41% growth, the company is positioned for a weaker revenue result.

With this information, we can see why SMART Global Holdings is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From SMART Global Holdings' P/S?

Even after such a strong price move, SMART Global Holdings' P/S still trails the rest of the industry. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that SMART Global Holdings maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 4 warning signs for SMART Global Holdings (2 are a bit unpleasant!) that you should be aware of.

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.

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