Investors Don't See Light At End Of Five9, Inc.'s (NASDAQ:FIVN) Tunnel And Push Stock Down 29%

Five9, Inc. (NASDAQ:FIVN) shareholders that were waiting for something to happen have been dealt a blow with a 29% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 51% loss during that time.

Since its price has dipped substantially, Five9 may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 2.1x, considering almost half of all companies in the Software industry in the United States have P/S ratios greater than 4.6x and even P/S higher than 10x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

See our latest analysis for Five9

What Does Five9's P/S Mean For Shareholders?

Five9's revenue growth of late has been pretty similar to most other companies. It might be that many expect the mediocre revenue performance to degrade, which has repressed the P/S ratio. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Five9 will help you uncover what's on the horizon.

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 Five9's to be considered reasonable.

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. Pleasingly, revenue has also lifted 71% 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.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 11% per year over the next three years. That's shaping up to be materially lower than the 21% per annum growth forecast for the broader industry.

In light of this, it's understandable that Five9's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Shares in Five9 have plummeted and its P/S has followed suit. 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.

As we suspected, our examination of Five9's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Five9 that you should be aware of.

If you're unsure about the strength of Five9'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.