CEVA, Inc. (NASDAQ:CEVA)’s 31% price increase doesn’t match its sales

Despite an already strong run CEVA, Inc. (NASDAQ:CEVA) shares are on the rise, up 31% in the last thirty days. Looking back a little further, it’s encouraging to see that the stock is up 44% in the last year.

After such a big jump in prices, CEVA is currently sending potentially very bearish signals with a price-to-sales ratio (or “P/S”) of 7.2x, as almost half of all companies in the semiconductor industry are in the United States in the P/S Ratios below 4x and even P/S ratios below 1.7x are not uncommon. However, the P/S may be quite high for a reason and further research is needed to determine whether it is justified.

Check out our latest analysis for CEVA

How CEVA performed

While the industry has seen revenue growth recently, CEVA’s sales have gone into reverse, which isn’t great. It could be that many are expecting the weak sales performance to recover significantly, which has prevented the price-to-earnings ratio collapse. You’d really hope so, otherwise you’ll be paying a pretty hefty price for no particular reason.

Want to find out how analysts think CEVA’s future compares to the industry? In this case ours free The report is a good start.

How is CEVA’s sales growth developing?

To justify its P/E ratio, CEVA would need to deliver outstanding growth well above the industry.

Looking back, last year resulted in a frustrating 1.7% decline in the company’s revenue. The last three years didn’t look good either, with the company seeing its revenue shrink by 13% overall. Accordingly, shareholders would have been optimistic about medium-term revenue growth rates.

As for the outlook, next year is expected to generate 10% growth, according to the five analysts covering the company. Meanwhile, the rest of the industry is expected to grow by 40%, which is much more attractive.

Based on this information, we find it concerning that CEVA is trading at a P/E ratio that is higher than the industry. It seems that most investors are hoping for a turnaround in the company’s business prospects, but the analyst cohort is not as confident that this will happen. Only the bravest assume that these prices are sustainable, as this sales growth will ultimately weigh heavily on the share price.

What does CEVA’s P/E mean for investors?

The sharp rise in the share price has also led to a jump in CEVA’s P/E ratio. We would say that the price-to-sales ratio is not primarily a valuation tool, but rather is used to measure current investor sentiment and future expectations.

We have concluded that CEVA is currently trading at a much higher P/E than expected because its forecast growth is lower than that of the broader industry. The company’s weak revenue estimate doesn’t bode well for its elevated P/E ratio, which could decline if revenue sentiment doesn’t improve. At this price level, investors should remain cautious, especially if the situation does not improve.

Many other important risk factors can be found on the company’s balance sheet. Our free CEVA balance sheet analysis with six simple checks allows you to identify any risks that could be a problem.

If yes uncertain about the strength of CEVA’s businessExplore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.