There's Reason For Concern Over Allwinner Technology Co.,Ltd.'s (SZSE:300458) Massive 41% Price Jump

Allwinner Technology Co.,Ltd. (SZSE:300458) shares have had a really impressive month, gaining 41% after a shaky period beforehand. The annual gain comes to 212% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Allwinner TechnologyLtd's price-to-sales (or "P/S") ratio of 11.8x 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 Allwinner TechnologyLtd

What Does Allwinner TechnologyLtd's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Allwinner TechnologyLtd has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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 Allwinner TechnologyLtd will help you uncover what's on the horizon.

How Is Allwinner TechnologyLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Allwinner TechnologyLtd's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 53% last year. Revenue has also lifted 11% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 22% over the next year. That's shaping up to be materially lower than the 49% growth forecast for the broader industry.

With this information, we find it concerning that Allwinner TechnologyLtd is trading at a P/S higher than the industry. 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.

The Final Word

Allwinner TechnologyLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

It comes as a surprise to see Allwinner TechnologyLtd 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 always need to take note of risks, for example - Allwinner TechnologyLtd has 2 warning signs we think you should be aware 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.