Giga Device Semiconductor Inc.'s (SHSE:603986) Price Is Out Of Tune With Revenues

You may think that with a price-to-sales (or "P/S") ratio of 9.7x Giga Device Semiconductor Inc. (SHSE:603986) is a stock to avoid completely, seeing as almost half of all the Semiconductor companies in China have P/S ratios under 5.6x and even P/S lower than 2x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Giga Device Semiconductor

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

Giga Device Semiconductor hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. 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.

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

How Is Giga Device Semiconductor's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Giga Device Semiconductor's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 14% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next year should generate growth of 28% as estimated by the analysts watching the company. That's shaping up to be materially lower than the 36% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Giga Device Semiconductor's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Giga Device Semiconductor's P/S?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It comes as a surprise to see Giga Device Semiconductor trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Giga Device Semiconductor you should be aware of.

If you're unsure about the strength of Giga Device Semiconductor's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.