Phunware, Inc.'s (NASDAQ:PHUN) 40% Dip In Price Shows Sentiment Is Matching Revenues

Unfortunately for some shareholders, the Phunware, Inc. (NASDAQ:PHUN) share price has dived 40% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 91% share price decline.

Since its price has dipped substantially, Phunware's price-to-sales (or "P/S") ratio of 0.9x might make it look like a strong buy right now compared to the wider Software industry in the United States, where around half of the companies have P/S ratios above 4.4x and even P/S above 11x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Phunware

How Phunware Has Been Performing

Phunware could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

How Is Phunware's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as Phunware's is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 48% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 22% as estimated by the four analysts watching the company. With the industry predicted to deliver 15% growth, that's a disappointing outcome.

With this in consideration, we find it intriguing that Phunware's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Shares in Phunware have plummeted and its P/S has followed suit. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Phunware's analyst forecasts revealed that its outlook for shrinking revenue 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Phunware (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

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.