Couchbase, Inc. (NASDAQ:BASE) Shares Slammed 29% But Getting In Cheap Might Be Difficult Regardless

Couchbase, Inc. (NASDAQ:BASE) shareholders that were waiting for something to happen have been dealt a blow with a 29% share price drop in the last month. Longer-term, the stock has been solid despite a difficult 30 days, gaining 17% in the last year.

Although its price has dipped substantially, when almost half of the companies in the United States' IT industry have price-to-sales ratios (or "P/S") below 1.8x, you may still consider Couchbase as a stock not worth researching with its 5.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Couchbase

How Couchbase Has Been Performing

Revenue has risen firmly for Couchbase recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Couchbase, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Couchbase's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. The latest three year period has also seen an excellent 66% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 8.4% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Couchbase is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Couchbase's P/S?

Even after such a strong price drop, Couchbase's P/S still exceeds the industry median significantly. 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 established that Couchbase maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. In the eyes of shareholders, the probability of a continued growth trajectory is great enough to prevent the P/S from pulling back. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Couchbase you should be aware of, and 1 of them doesn't sit too well with us.

If you're unsure about the strength of Couchbase'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.