Investors Don't See Light At End Of Zuora, Inc.'s (NYSE:ZUO) Tunnel

You may think that with a price-to-sales (or "P/S") ratio of 3.3x Zuora, Inc. (NYSE:ZUO) is a stock worth checking out, seeing as almost half of all the Software companies in the United States have P/S ratios greater than 4.3x and even P/S higher than 11x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Zuora

How Has Zuora Performed Recently?

Zuora could be doing better as it's been growing revenue less than most other companies lately. 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.

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

How Is Zuora's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 8.0% gain to the company's revenues. Pleasingly, revenue has also lifted 41% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 6.3% during the coming year according to the six analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 14%, which is noticeably more attractive.

With this in consideration, its clear as to why Zuora's P/S is falling short industry peers. 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 Zuora's P/S Mean For Investors?

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 Zuora's analyst forecasts revealed that its inferior revenue outlook is contributing 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Zuora that you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com