SecureWorks Corp.'s (NASDAQ:SCWX) Price Is Right But Growth Is Lacking After Shares Rocket 27%

SecureWorks Corp. (NASDAQ:SCWX) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 6.6% isn't as attractive.

Although its price has surged higher, SecureWorks may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.8x, since almost half of all companies in the Software industry in the United States have P/S ratios greater than 4.4x and even P/S higher than 12x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

View our latest analysis for SecureWorks

What Does SecureWorks' P/S Mean For Shareholders?

SecureWorks 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 SecureWorks will help you uncover what's on the horizon.

How Is SecureWorks' Revenue Growth Trending?

SecureWorks' 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.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's top line. As a result, revenue from three years ago have also fallen 36% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the three analysts covering the company suggest revenue growth is heading into negative territory, declining 6.6% over the next year. Meanwhile, the broader industry is forecast to expand by 14%, which paints a poor picture.

In light of this, it's understandable that SecureWorks' P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

SecureWorks' recent share price jump still sees fails to bring its P/S alongside the industry median. 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.

As we suspected, our examination of SecureWorks' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, SecureWorks' poor outlook justifies its low P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

You always need to take note of risks, for example - SecureWorks has 2 warning signs we think you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com