Espressif Systems (Shanghai) Co., Ltd.'s (SHSE:688018) 30% Price Boost Is Out Of Tune With Revenues

Espressif Systems (Shanghai) Co., Ltd. (SHSE:688018) shares have continued their recent momentum with a 30% gain in the last month alone. This latest share price bounce rounds out a remarkable 379% gain over the last twelve months.

After such a large jump in price, Espressif Systems (Shanghai) may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 15.9x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 6.8x and even P/S lower than 3x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Espressif Systems (Shanghai)

What Does Espressif Systems (Shanghai)'s P/S Mean For Shareholders?

Recent times have been advantageous for Espressif Systems (Shanghai) as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Espressif Systems (Shanghai) will help you uncover what's on the horizon.

How Is Espressif Systems (Shanghai)'s Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 38% last year. The strong recent performance means it was also able to grow revenue by 49% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 33% during the coming year according to the four analysts following the company. That's shaping up to be materially lower than the 49% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Espressif Systems (Shanghai)'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. 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 Espressif Systems (Shanghai)'s P/S?

Shares in Espressif Systems (Shanghai) have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Espressif Systems (Shanghai), 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Espressif Systems (Shanghai) that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.