Agora, Inc. (NASDAQ:API) shares have had a horrible month, losing 41% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 28%, which is great even in a bull market.

After such a large drop in price, Agora's price-to-sales (or "P/S") ratio of 2.2x might make it look like a buy right now compared to the Software industry in the United States, where around half of the companies have P/S ratios above 4x and even P/S above 9x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Agora

What Does Agora's Recent Performance Look Like?

Agora could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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Is There Any Revenue Growth Forecasted For Agora?

The only time you'd be truly comfortable seeing a P/S as low as Agora's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 5.9% decrease to the company's top line. As a result, revenue from three years ago have also fallen 21% overall. 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 12% each year during the coming three years according to the dual analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 15% per annum, which is noticeably more attractive.

With this in consideration, its clear as to why Agora's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Agora's P/S?

Agora's recently weak share price has pulled its P/S back below other Software companies. 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 expected, our analysis of Agora's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

Having said that, be aware Agora is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Agora'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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