Zoom Video Communications, Inc.'s (NASDAQ:ZM) Business Is Trailing The Industry But Its Shares Aren't

It's not a stretch to say that Zoom Video Communications, Inc.'s (NASDAQ:ZM) price-to-sales (or "P/S") ratio of 4.4x right now seems quite "middle-of-the-road" for companies in the Software industry in the United States, where the median P/S ratio is around 4.5x. 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 Zoom Video Communications

How Zoom Video Communications Has Been Performing

Zoom Video Communications 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 strengthen positively, which has kept the P/S ratio from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

Zoom Video Communications' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a decent 3.1% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 71% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 3.4% per annum during the coming three years according to the analysts following the company. With the industry predicted to deliver 15% growth per annum, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Zoom Video Communications' P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. 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

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

When you consider that Zoom Video Communications' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. 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. 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 1 warning sign for Zoom Video Communications you should know about.

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.