Revenues Not Telling The Story For WalkMe Ltd. (NASDAQ:WKME) After Shares Rise 68%

WalkMe Ltd. (NASDAQ:WKME) shareholders have had their patience rewarded with a 68% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 48% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about WalkMe's P/S ratio of 4.8x, since the median price-to-sales (or "P/S") ratio for the Software industry in the United States is also close to 4.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for WalkMe

What Does WalkMe's Recent Performance Look Like?

Recent times haven't been great for WalkMe as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Do Revenue Forecasts Match The P/S Ratio?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 6.1% last year. The latest three year period has also seen an excellent 72% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 9.7% each year over the next three years. That's shaping up to be materially lower than the 15% each year growth forecast for the broader industry.

With this information, we find it interesting that WalkMe is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

WalkMe appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look at the analysts forecasts of WalkMe's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for WalkMe that you need to be mindful of.

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.