BuildDirect.com Technologies Inc. (CVE:BILD) Stock Rockets 38% As Investors Are Less Pessimistic Than Expected

BuildDirect.com Technologies Inc. (CVE:BILD) shares have continued their recent momentum with a 38% gain in the last month alone. The last month tops off a massive increase of 230% in the last year.

Even after such a large jump in price, there still wouldn't be many who think BuildDirect.com Technologies' price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in Canada's Specialty Retail industry is similar at about 0.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for BuildDirect.com Technologies

How Has BuildDirect.com Technologies Performed Recently?

While the industry has experienced revenue growth lately, BuildDirect.com Technologies' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, BuildDirect.com Technologies would need to produce growth that's similar to the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 18%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 48% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 24% as estimated by the sole analyst watching the company. Meanwhile, the broader industry is forecast to expand by 8.6%, which paints a poor picture.

With this in consideration, we think it doesn't make sense that BuildDirect.com Technologies' P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. 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 negative growth outlook.

The Final Word

BuildDirect.com Technologies' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

It appears that BuildDirect.com Technologies currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

Having said that, be aware BuildDirect.com Technologies is showing 3 warning signs in our investment analysis, and 1 of those is potentially serious.

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.