Why Investors Shouldn't Be Surprised By MicroAlgo Inc.'s (NASDAQ:MLGO) 76% Share Price Plunge

The MicroAlgo Inc. (NASDAQ:MLGO) share price has softened a substantial 76% over the previous 30 days, handing back much of the gains the stock has made lately. For any long-term shareholders, the last month ends a year to forget by locking in a 89% share price decline.

Since its price has dipped substantially, MicroAlgo's price-to-sales (or "P/S") ratio of 0.7x might make it look like a buy right now compared to the IT industry in the United States, where around half of the companies have P/S ratios above 2.5x and even P/S above 6x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for MicroAlgo

How Has MicroAlgo Performed Recently?

As an illustration, revenue has deteriorated at MicroAlgo over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on MicroAlgo will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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

How Is MicroAlgo's Revenue Growth Trending?

In order to justify its P/S ratio, MicroAlgo would need to produce sluggish growth that's trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 6.6%. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 14% shows it's noticeably less attractive.

In light of this, it's understandable that MicroAlgo's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

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

MicroAlgo's P/S has taken a dip along with its share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of MicroAlgo confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 4 warning signs we've spotted with MicroAlgo (including 3 which are a bit concerning).

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.