Everspin Technologies, Inc.'s (NASDAQ:MRAM) Shares Climb 39% But Its Business Is Yet to Catch Up

Everspin Technologies, Inc. (NASDAQ:MRAM) shareholders would be excited to see that the share price has had a great month, posting a 39% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 86%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Everspin Technologies' P/S ratio of 5.1x, since the median price-to-sales (or "P/S") ratio for the Semiconductor industry in the United States is also close to 5.7x. 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.

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See our latest analysis for Everspin Technologies

What Does Everspin Technologies' P/S Mean For Shareholders?

Everspin Technologies hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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Do Revenue Forecasts Match The P/S Ratio?

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

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 14% drop in revenue. 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 climb by 9.4% during the coming year according to the two analysts following the company. That's shaping up to be materially lower than the 45% growth forecast for the broader industry.

With this in mind, we find it intriguing that Everspin Technologies' P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Its shares have lifted substantially and now Everspin Technologies' P/S is back within range of the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look at the analysts forecasts of Everspin Technologies' revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Everspin Technologies, and understanding them should be part of your investment process.

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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.