Getting In Cheap On Pegasystems Inc. (NASDAQ:PEGA) Is Unlikely

With a median price-to-sales (or "P/S") ratio of close to 4.3x in the Software industry in the United States, you could be forgiven for feeling indifferent about Pegasystems Inc.'s (NASDAQ:PEGA) P/S ratio of 3.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Pegasystems

What Does Pegasystems' P/S Mean For Shareholders?

Pegasystems' revenue growth of late has been pretty similar to most other companies. The P/S ratio is probably moderate because investors think this modest revenue performance will continue. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Pegasystems.

How Is Pegasystems' Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Pegasystems' is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a terrific increase of 15%. As a result, it also grew revenue by 28% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 5.3% each year during the coming three years according to the twelve analysts following the company. That's shaping up to be materially lower than the 18% each year growth forecast for the broader industry.

In light of this, it's curious that Pegasystems' P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Pegasystems' P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look at the analysts forecasts of Pegasystems' revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Pegasystems you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.