Revenues Not Telling The Story For Melon S.A. (SNSE:MELON) After Shares Rise 39%

The Melon S.A. (SNSE:MELON) share price has done very well over the last month, posting an excellent gain of 39%. The last 30 days bring the annual gain to a very sharp 39%.

In spite of the firm bounce in price, it's still not a stretch to say that Melon's price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Basic Materials industry in Chile, seeing as it matches the P/S ratio of the wider industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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See our latest analysis for Melon

What Does Melon's P/S Mean For Shareholders?

The revenue growth achieved at Melon over the last year would be more than acceptable for most companies. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Melon will help you shine a light on its historical performance.

How Is Melon's Revenue Growth Trending?

Melon's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a decent 7.8% gain to the company's revenues. However, due to its less than impressive performance prior to this period, revenue growth is practically non-existent over the last three years overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 8.4% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Melon's P/S is comparable to that of its industry peers. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Melon's 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.

We've established that Melon's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

You should always think about risks. Case in point, we've spotted 3 warning signs for Melon you should be aware of, and 1 of them is a bit unpleasant.

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