Why Investors Shouldn't Be Surprised By Bitfarms Ltd.'s (TSE:BITF) 75% Share Price Surge

Bitfarms Ltd. (TSE:BITF) shares have had a really impressive month, gaining 75% after a shaky period beforehand. The last month tops off a massive increase of 156% in the last year.

After such a large jump in price, Bitfarms may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 6.9x, since almost half of all companies in the Software industry in Canada have P/S ratios under 3.5x and even P/S lower than 1.3x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Bitfarms

What Does Bitfarms' Recent Performance Look Like?

Bitfarms' revenue growth of late has been pretty similar to most other companies. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Bitfarms' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Bitfarms?

In order to justify its P/S ratio, Bitfarms would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 26%. The latest three year period has also seen an excellent 209% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 90% during the coming year according to the seven analysts following the company. That's shaping up to be materially higher than the 21% growth forecast for the broader industry.

With this in mind, it's not hard to understand why Bitfarms' P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Bitfarms' P/S?

The strong share price surge has lead to Bitfarms' P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look into Bitfarms shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Bitfarms (2 are potentially serious!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com