17 Education & Technology Group Inc.'s (NASDAQ:YQ) 36% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio
17 Education & Technology Group Inc. (NASDAQ:YQ) shares have retraced a considerable 36% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 88%, which is great even in a bull market.
Although its price has dipped substantially, when almost half of the companies in the United States' Consumer Services industry have price-to-sales ratios (or "P/S") below 1.4x, you may still consider 17 Education & Technology Group as a stock probably not worth researching with its 2.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.
Check out our latest analysis for 17 Education & Technology Group
How Has 17 Education & Technology Group Performed Recently?
For example, consider that 17 Education & Technology Group's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.
Although there are no analyst estimates available for 17 Education & Technology Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.What Are Revenue Growth Metrics Telling Us About The High P/S?
There's an inherent assumption that a company should outperform the industry for P/S ratios like 17 Education & Technology Group's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 48% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 90% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 9.0% shows it's an unpleasant look.
With this information, we find it concerning that 17 Education & Technology Group is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.
The Bottom Line On 17 Education & Technology Group's P/S
Despite the recent share price weakness, 17 Education & Technology Group's P/S remains higher than most other companies in the industry. 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.
Our examination of 17 Education & Technology Group revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.
Before you take the next step, you should know about the 3 warning signs for 17 Education & Technology Group (1 is significant!) that we have uncovered.
If you're unsure about the strength of 17 Education & Technology Group'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.