Digimarc Corporation's (NASDAQ:DMRC) Popularity With Investors Under Threat As Stock Sinks 59%

Digimarc Corporation (NASDAQ:DMRC) shareholders that were waiting for something to happen have been dealt a blow with a 59% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 49% share price drop.

In spite of the heavy fall in price, Digimarc may still be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 7.9x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 4.6x and even P/S lower than 1.8x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Digimarc

What Does Digimarc's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Digimarc has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Digimarc will help you uncover what's on the horizon.

How Is Digimarc's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 10%. The latest three year period has also seen an excellent 45% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to slump, contracting by 10% during the coming year according to the dual analysts following the company. Meanwhile, the broader industry is forecast to expand by 19%, which paints a poor picture.

With this in mind, we find it intriguing that Digimarc's P/S is closely matching its industry peers. 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. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

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

Even after such a strong price drop, Digimarc's P/S still exceeds the industry median significantly. 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.

For a company with revenues that are set to decline in the context of a growing industry, Digimarc's P/S is much higher than we would've anticipated. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. At these price levels, investors should remain cautious, particularly if things don't improve.

Plus, you should also learn about these 4 warning signs we've spotted with Digimarc (including 2 which can't be ignored).

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.