What Allwinner Technology Co.,Ltd.'s (SZSE:300458) 26% Share Price Gain Is Not Telling You

Despite an already strong run, Allwinner Technology Co.,Ltd. (SZSE:300458) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 94%.

Following the firm bounce in price, Allwinner TechnologyLtd may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 9.7x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 7.3x and even P/S lower than 3x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Allwinner TechnologyLtd

How Allwinner TechnologyLtd Has Been Performing

With revenue growth that's superior to most other companies of late, Allwinner TechnologyLtd has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Allwinner TechnologyLtd's future stacks up against the industry? In that case, our free report is a great place to start.

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

There's an inherent assumption that a company should 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. The latest three year period has also seen a 11% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Looking ahead now, revenue is anticipated to climb by 22% during the coming year according to the dual analysts following the company. That's shaping up to be materially lower than the 49% growth forecast for the broader industry.

In light of this, it's alarming that Allwinner TechnologyLtd's P/S sits above the majority of other companies. 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. 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 Does Allwinner TechnologyLtd's P/S Mean For Investors?

Allwinner TechnologyLtd's P/S is on the rise since its shares have risen strongly. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Allwinner TechnologyLtd, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Allwinner TechnologyLtd (1 is significant) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.