Why Investors Shouldn't Be Surprised By NET263 Ltd.'s (SZSE:002467) 37% Share Price Surge

NET263 Ltd. (SZSE:002467) shares have continued their recent momentum with a 37% gain in the last month alone. The last month tops off a massive increase of 124% in the last year.

Since its price has surged higher, NET263 may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 10.9x, when you consider almost half of the companies in the Telecom industry in China have P/S ratios under 4.7x and even P/S lower than 2x 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 NET263

How NET263 Has Been Performing

NET263 certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. It seems that many are expecting the company to continue defying the broader industry adversity, which has increased investors’ willingness to pay up for the stock. 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 NET263.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, NET263 would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. That's essentially a continuation of what we've seen over the last three years, as its revenue growth has been virtually non-existent for that entire period. Therefore, it's fair to say that revenue growth has definitely eluded the company recently.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 7.7% over the next year. With the industry only predicted to deliver 4.9%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that NET263's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On NET263's P/S

Shares in NET263 have seen a strong upwards swing lately, which has really helped boost its P/S figure. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that NET263 maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Telecom industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for NET263 you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.