Similarweb Ltd. (NYSE:SMWB) Surges 28% Yet Its Low P/S Is No Reason For Excitement

Despite an already strong run, Similarweb Ltd. (NYSE:SMWB) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 163% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, Similarweb's price-to-sales (or "P/S") ratio of 4.5x might still make it look like a buy right now compared to the Software industry in the United States, where around half of the companies have P/S ratios above 5.8x and even P/S above 13x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Similarweb

What Does Similarweb's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Similarweb has been relatively sluggish. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. 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 Similarweb.

How Is Similarweb's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 13%. The latest three year period has also seen an excellent 94% 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.

Turning to the outlook, the next year should generate growth of 15% as estimated by the eight analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 26%, which is noticeably more attractive.

In light of this, it's understandable that Similarweb's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Similarweb's P/S

The latest share price surge wasn't enough to lift Similarweb's P/S close to the industry median. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As expected, our analysis of Similarweb's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Similarweb that you should be aware of.

If these risks are making you reconsider your opinion on Similarweb, 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.