Amplitude, Inc. (NASDAQ:AMPL) May Have Run Too Fast Too Soon With Recent 33% Price Plummet

Amplitude, Inc. (NASDAQ:AMPL) shares have had a horrible month, losing 33% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 20% in that time.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Amplitude's P/S ratio of 3.7x, since the median price-to-sales (or "P/S") ratio for the Software industry in the United States is also close to 4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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See our latest analysis for Amplitude

How Has Amplitude Performed Recently?

With revenue growth that's inferior to most other companies of late, Amplitude has been relatively sluggish. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

Is There Some Revenue Growth Forecasted For Amplitude?

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

Retrospectively, the last year delivered a decent 8.3% gain to the company's revenues. Pleasingly, revenue has also lifted 79% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next three years should generate growth of 12% per year as estimated by the eleven analysts watching the company. With the industry predicted to deliver 15% growth per year, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Amplitude's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Following Amplitude's share price tumble, its P/S is just clinging on to the industry median P/S. 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.

When you consider that Amplitude's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Before you take the next step, you should know about the 1 warning sign for Amplitude that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.