SMS (TSE:2175) Shares Just Moved, So What Is Going On?

SMS (TSE:2175) has drawn investor attention after recent share price gains over the month and past 3 months. The move comes as the Tokyo based healthcare and elderly care services platform reports positive annual revenue and net income growth.

Over the past year, SMS has shown strong momentum, with an 82.37% year to date share price return and a 58.30% total shareholder return. However, longer term three and five year total shareholder returns of 8.96% and 34.53% declines highlight how recent gains follow a weaker period.

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After such a sharp rebound in SMS and a current share price of ¥2,462, the balance between recent momentum and past drawdowns matters. Do today’s fundamentals and valuation still leave enough upside to justify the risk?

Preferred Price-to-Sales Multiple of 3x: Is it justified?

On one hand, the SWS DCF model suggests SMS could be undervalued, with an estimated future cash flow value of ¥3,316.91 versus the current ¥2,462 share price. On the other, the stock trades on a 3x Price-to-Sales ratio that screens as expensive relative to peers, so it is worth unpacking what that means.

The P/S multiple compares a company’s market value to its revenue. For a platform business like SMS that is currently loss making but growing revenue by 9.85% annually, investors often focus on sales rather than earnings to gauge what they are paying for each unit of turnover.

At 3x sales, SMS is described as expensive against both the peer group average of 2.6x and the broader JP Professional Services industry average of 0.9x. That points to the market assigning a richer revenue tag to SMS than to many listed competitors. However, the fair Price-to-Sales ratio implied by the SWS model is 4.3x, which is materially higher than the current 3x. If sentiment or fundamentals align with that fair level, there is scope for the market’s revenue multiple to move closer to that reference point.

Explore the SWS fair ratio for SMS

Result: Price-to-Sales of 3x (ABOUT RIGHT)

However, SMS still carries risks, including current net losses of ¥14,529 and a revenue multiple above the broader industry, which could limit future rerating potential.

Find out about the key risks to this SMS narrative.

Another view on SMS using DCF

The P/S discussion paints SMS as relatively expensive against peers. Yet the SWS DCF model points the other way. It estimates a future cash flow value of ¥3,316.91 per share versus today’s ¥2,462, which frames the current price as cheaper on a cash flow basis. Which lens do you trust more for your own process?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out SMS for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 23 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

Given the mixed signals on SMS, it makes sense to move quickly and check the underlying data for yourself. To see what potential upsides others are watching, review the 2 key rewards.

Looking for more investment ideas beyond SMS?

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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.

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