When you see that almost half of the companies in the IT industry in the United States have price-to-sales ratios (or "P/S") below 1.5x, Snowflake Inc. (NYSE:SNOW) looks to be giving off strong sell signals with its 26.2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.
What Does Snowflake's P/S Mean For Shareholders?
With revenue growth that's superior to most other companies of late, Snowflake has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Snowflake.
How Is Snowflake's Revenue Growth Trending?
In order to justify its P/S ratio, Snowflake would need to produce outstanding growth that's well in excess of the industry.
Retrospectively, the last year delivered an exceptional 60% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.
Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 34% per year over the next three years. With the industry only predicted to deliver 13% each year, the company is positioned for a stronger revenue result.
With this information, we can see why Snowflake is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Snowflake's P/S
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.
We've established that Snowflake maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the IT industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.
You always need to take note of risks, for example - Snowflake has 2 warning signs we think you should be aware of.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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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