ADTRAN Holdings, Inc. (NASDAQ:ADTN) Might Not Be As Mispriced As It Looks After Plunging 33%

To the annoyance of some shareholders, ADTRAN Holdings, Inc. (NASDAQ:ADTN) shares are down a considerable 33% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 42% share price drop.

Although its price has dipped substantially, it's still not a stretch to say that ADTRAN Holdings' price-to-sales (or "P/S") ratio of 0.8x right now seems quite "middle-of-the-road" compared to the Communications industry in the United States, where the median P/S ratio is around 1.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for ADTRAN Holdings

How Has ADTRAN Holdings Performed Recently?

With revenue growth that's superior to most other companies of late, ADTRAN Holdings has been doing relatively well. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

Is There Some Revenue Growth Forecasted For ADTRAN Holdings?

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

Taking a look back first, we see that the company grew revenue by an impressive 82% last year. The strong recent performance means it was also able to grow revenue by 93% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 23% each year as estimated by the seven analysts watching the company. With the industry only predicted to deliver 7.2% per year, the company is positioned for a stronger revenue result.

With this in consideration, we find it intriguing that ADTRAN Holdings' P/S is closely matching its industry peers. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What Does ADTRAN Holdings' P/S Mean For Investors?

With its share price dropping off a cliff, the P/S for ADTRAN Holdings looks to be in line with the rest of the Communications industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that ADTRAN Holdings currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

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

If these risks are making you reconsider your opinion on ADTRAN Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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