Ooma, Inc.'s (NYSE:OOMA) Low P/S No Reason For Excitement

Ooma, Inc.'s (NYSE:OOMA) price-to-sales (or "P/S") ratio of 1.4x might make it look like a strong buy right now compared to the Software industry in the United States, where around half of the companies have P/S ratios above 5.1x and even P/S above 11x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

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See our latest analysis for Ooma

What Does Ooma's Recent Performance Look Like?

Ooma could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as Ooma's is when the company's growth is on track to lag the industry decidedly.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.4% last year. The latest three year period has also seen a 29% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 6.4% per annum over the next three years. With the industry predicted to deliver 36% growth each year, the company is positioned for a weaker revenue result.

With this information, we can see why Ooma is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Ooma's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.

It is also worth noting that we have found 1 warning sign for Ooma that you need to take into consideration.

If you're unsure about the strength of Ooma's 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.