SolarWinds Corporation's (NYSE:SWI) Shares Lagging The Industry But So Is The Business

SolarWinds Corporation's (NYSE:SWI) price-to-sales (or "P/S") ratio of 2.8x might 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 4.8x and even P/S above 11x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for SolarWinds

How Has SolarWinds Performed Recently?

With revenue growth that's inferior to most other companies of late, SolarWinds has been relatively sluggish. 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.

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

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, SolarWinds would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a decent 5.0% gain to the company's revenues. The latest three year period has also seen a 9.4% 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.

Looking ahead now, revenue is anticipated to climb by 3.0% during the coming year according to the seven analysts following the company. That's shaping up to be materially lower than the 25% growth forecast for the broader industry.

In light of this, it's understandable that SolarWinds' P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What Does SolarWinds' P/S Mean For Investors?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that SolarWinds maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for SolarWinds (1 is concerning!) that you need to be mindful of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.