Investor Optimism Abounds Varonis Systems, Inc. (NASDAQ:VRNS) But Growth Is Lacking

With a price-to-sales (or "P/S") ratio of 9.1x Varonis Systems, Inc. (NASDAQ:VRNS) may be sending very bearish signals at the moment, given that almost half of all the Software companies in the United States have P/S ratios under 5.6x and even P/S lower than 2x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Varonis Systems

What Does Varonis Systems' Recent Performance Look Like?

Varonis Systems could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Varonis Systems would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 12% last year. This was backed up an excellent period prior to see revenue up by 52% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 13% per annum over the next three years. That's shaping up to be materially lower than the 20% per annum growth forecast for the broader industry.

In light of this, it's alarming that Varonis Systems' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Varonis Systems, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Varonis Systems that you need to be mindful of.

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.