Optimistic Investors Push Audinate Group Limited (ASX:AD8) Shares Up 50% But Growth Is Lacking

Audinate Group Limited (ASX:AD8) shareholders would be excited to see that the share price has had a great month, posting a 50% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 59%.

After such a large jump in price, when almost half of the companies in Australia's Electronic industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider Audinate Group as a stock not worth researching with its 15.3x 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.

See our latest analysis for Audinate Group

How Has Audinate Group Performed Recently?

Recent times have been advantageous for Audinate Group as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Audinate Group.

Is There Enough Revenue Growth Forecasted For Audinate Group?

Audinate Group'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.

Taking a look back first, we see that the company grew revenue by an impressive 51% last year. The strong recent performance means it was also able to grow revenue by 130% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 25% per year as estimated by the six analysts watching the company. With the industry predicted to deliver 36% growth per year, the company is positioned for a weaker revenue result.

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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Audinate Group's P/S Mean For Investors?

Audinate Group's P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Audinate Group, this doesn't appear to be impacting the P/S in the slightest. 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.

Before you take the next step, you should know about the 1 warning sign for Audinate Group that we have uncovered.

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.