GSE Systems, Inc. (NASDAQ:GVP) Might Not Be As Mispriced As It Looks After Plunging 37%

The GSE Systems, Inc. (NASDAQ:GVP) share price has fared very poorly over the last month, falling by a substantial 37%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 76% loss during that time.

After such a large drop in price, GSE Systems may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.1x, considering almost half of all companies in the Software industry in the United States have P/S ratios greater than 4.5x and even P/S higher than 11x aren't out of the ordinary. 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 GSE Systems

How GSE Systems Has Been Performing

GSE Systems 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. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

Do Revenue Forecasts Match The Low P/S Ratio?

GSE Systems' P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 10%. The last three years don't look nice either as the company has shrunk revenue by 27% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 15% per annum as estimated by the sole analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 17% per year, which is not materially different.

With this information, we find it odd that GSE Systems is trading at a P/S lower than the industry. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

GSE Systems' P/S looks about as weak as its stock price lately. 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.

It looks to us like the P/S figures for GSE Systems remain low despite growth that is expected to be in line with other companies in the industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. It appears some are indeed anticipating revenue instability, because these conditions should normally provide more support to the share price.

Plus, you should also learn about these 5 warning signs we've spotted with GSE Systems (including 3 which don't sit too well with us).

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.