Why Investors Shouldn't Be Surprised By VerifyMe, Inc.'s (NASDAQ:VRME) 28% Share Price Plunge

VerifyMe, Inc. (NASDAQ:VRME) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 18% in the last year.

Since its price has dipped substantially, VerifyMe may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.4x, considering almost half of all companies in the Electronic industry in the United States have P/S ratios greater than 2.4x and even P/S higher than 6x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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View our latest analysis for VerifyMe

What Does VerifyMe's Recent Performance Look Like?

While the industry has experienced revenue growth lately, VerifyMe's revenue has gone into reverse gear, which is not great. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Keen to find out how analysts think VerifyMe'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 VerifyMe?

VerifyMe's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 14%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 114% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 19% as estimated by the two analysts watching the company. That's not great when the rest of the industry is expected to grow by 17%.

With this in consideration, we find it intriguing that VerifyMe's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Having almost fallen off a cliff, VerifyMe's share price has pulled its P/S way down as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of VerifyMe's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, VerifyMe's poor outlook justifies its low P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware VerifyMe is showing 4 warning signs in our investment analysis, and 2 of those are significant.

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