Silicom Ltd.'s (NASDAQ:SILC) Shares May Have Run Too Fast Too Soon

With a median price-to-sales (or "P/S") ratio of close to 1.1x in the Communications industry in the United States, you could be forgiven for feeling indifferent about Silicom Ltd.'s (NASDAQ:SILC) P/S ratio of 0.8x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Silicom

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

Silicom could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Silicom's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 35% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 11% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to slump, contracting by 25% during the coming year according to the lone analyst following the company. With the industry predicted to deliver 4.5% growth, that's a disappointing outcome.

With this in consideration, we think it doesn't make sense that Silicom's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Bottom Line On Silicom's P/S

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.

It appears that Silicom currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Silicom (1 can't be ignored) you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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