SiteMinder Limited's (ASX:SDR) 34% Share Price Surge Not Quite Adding Up

Despite an already strong run, SiteMinder Limited (ASX:SDR) shares have been powering on, with a gain of 34% in the last thirty days. The last 30 days bring the annual gain to a very sharp 34%.

Following the firm bounce in price, given around half the companies in Australia's Software industry have price-to-sales ratios (or "P/S") below 3.3x, you may consider SiteMinder as a stock to avoid entirely with its 8.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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See our latest analysis for SiteMinder

How Has SiteMinder Performed Recently?

SiteMinder's revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on SiteMinder will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

SiteMinder's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 18% gain to the company's top line. The latest three year period has also seen an excellent 93% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 24% each year over the next three years. That's shaping up to be materially lower than the 45% per year growth forecast for the broader industry.

In light of this, it's alarming that SiteMinder's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

Shares in SiteMinder have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 concluded that SiteMinder currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for SiteMinder with six simple checks on some of these key factors.

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

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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.