Similarweb Ltd.'s (NYSE:SMWB) Business And Shares Still Trailing The Industry

Similarweb Ltd.'s (NYSE:SMWB) price-to-sales (or "P/S") ratio of 2.2x 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 4.9x and even P/S above 10x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Similarweb

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

Recent times haven't been great for Similarweb as its revenue has been rising slower than most other companies. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Keen to find out how analysts think Similarweb's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Revenue Growth Forecasted For Similarweb?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Similarweb's to be considered reasonable.

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 51% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 15% over the next year. With the industry predicted to deliver 22% growth, the company is positioned for a weaker revenue result.

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.

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

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.

As we suspected, our examination of Similarweb'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.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Similarweb with six simple checks on some of these key factors.

If you're unsure about the strength of Similarweb'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.