There's Reason For Concern Over Telink Semiconductor(Shanghai)Co.,Ltd.'s (SHSE:688591) Massive 26% Price Jump

Telink Semiconductor(Shanghai)Co.,Ltd. (SHSE:688591) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 126% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Telink Semiconductor(Shanghai)Co.Ltd's price-to-sales (or "P/S") ratio of 13.3x 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 7.1x 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.

View our latest analysis for Telink Semiconductor(Shanghai)Co.Ltd

How Telink Semiconductor(Shanghai)Co.Ltd Has Been Performing

With revenue growth that's inferior to most other companies of late, Telink Semiconductor(Shanghai)Co.Ltd has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. 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 Telink Semiconductor(Shanghai)Co.Ltd.

Is There Enough Revenue Growth Forecasted For Telink Semiconductor(Shanghai)Co.Ltd?

The only time you'd be truly comfortable seeing a P/S as steep as Telink Semiconductor(Shanghai)Co.Ltd's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 15%. Revenue has also lifted 15% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 43% over the next year. Meanwhile, the rest of the industry is forecast to expand by 51%, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Telink Semiconductor(Shanghai)Co.Ltd'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.

What We Can Learn From Telink Semiconductor(Shanghai)Co.Ltd's P/S?

Shares in Telink Semiconductor(Shanghai)Co.Ltd 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.

We've concluded that Telink Semiconductor(Shanghai)Co.Ltd currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Telink Semiconductor(Shanghai)Co.Ltd that you need to take into consideration.

If these risks are making you reconsider your opinion on Telink Semiconductor(Shanghai)Co.Ltd, 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.