Audinate Group Limited's (ASX:AD8) Popularity With Investors Is Under Threat From Overpricing

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When you see that almost half of the companies in the Electronic industry in Australia have price-to-sales ratios (or "P/S") below 1.7x, Audinate Group Limited (ASX:AD8) looks to be giving off strong sell signals with its 7.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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How Has Audinate Group Performed Recently?

While the industry has experienced revenue growth lately, Audinate Group's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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How Is Audinate Group's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Audinate Group's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 32% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 34% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 16% per annum as estimated by the nine analysts watching the company. That's shaping up to be materially lower than the 50% per annum growth forecast for the broader industry.

In light of this, it's alarming that Audinate Group'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.

What We Can Learn From Audinate Group's P/S?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It comes as a surprise to see Audinate Group trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

You should always think about risks. Case in point, we've spotted 1 warning sign for Audinate Group you should be aware of.

If these risks are making you reconsider your opinion on Audinate Group, 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.