Giga Device Semiconductor Inc. (SHSE:603986) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

Giga Device Semiconductor Inc. (SHSE:603986) shares have continued their recent momentum with a 26% gain in the last month alone. Looking further back, the 22% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, Giga Device Semiconductor's price-to-sales (or "P/S") ratio of 10.6x might make it look like a strong sell right now compared to other companies in the Semiconductor industry in China, where around half of the companies have P/S ratios below 6.9x and even P/S below 3x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Giga Device Semiconductor

What Does Giga Device Semiconductor's Recent Performance Look Like?

Recent times have been advantageous for Giga Device Semiconductor 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

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

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 8.3% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 27% during the coming year according to the analysts following the company. With the industry predicted to deliver 48% growth, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Giga Device Semiconductor's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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.

The Final Word

Giga Device Semiconductor's P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Giga Device Semiconductor, 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Giga Device Semiconductor.

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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