There's Reason For Concern Over Curaleaf Holdings, Inc.'s (TSE:CURA) Massive 27% Price Jump

Despite an already strong run, Curaleaf Holdings, Inc. (TSE:CURA) shares have been powering on, with a gain of 27% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 3.7% isn't as impressive.

After such a large jump in price, when almost half of the companies in Canada's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider Curaleaf Holdings as a stock probably not worth researching with its 1.8x 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 as high as it is.

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See our latest analysis for Curaleaf Holdings

What Does Curaleaf Holdings' Recent Performance Look Like?

While the industry has experienced revenue growth lately, Curaleaf Holdings' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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Is There Enough Revenue Growth Forecasted For Curaleaf Holdings?

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

Retrospectively, the last year delivered a frustrating 5.4% decrease to the company's top line. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 4.4% per annum over the next three years. That's shaping up to be similar to the 5.1% per annum growth forecast for the broader industry.

In light of this, it's curious that Curaleaf Holdings' P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Key Takeaway

Curaleaf Holdings' P/S is on the rise since its shares have risen strongly. 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.

Analysts are forecasting Curaleaf Holdings' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. A positive change is needed in order to justify the current price-to-sales ratio.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Curaleaf Holdings (1 can't be ignored!) that you should be aware of before investing here.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.