Some Confidence Is Lacking In Fair Isaac Corporation's (NYSE:FICO) P/S

With a price-to-sales (or "P/S") ratio of 29.6x Fair Isaac Corporation (NYSE:FICO) 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 4.8x and even P/S lower than 1.7x 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.

See our latest analysis for Fair Isaac

What Does Fair Isaac's Recent Performance Look Like?

Fair Isaac could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Fair Isaac's Revenue Growth Trending?

Fair Isaac's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 12% last year. Revenue has also lifted 22% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 16% per year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 20% each year growth forecast for the broader industry.

With this information, we find it concerning that Fair Isaac is trading at a P/S higher than the industry. 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 Bottom Line On Fair Isaac's P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've concluded that Fair Isaac currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Fair Isaac is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Fair Isaac, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.