There's Reason For Concern Over SAP SE's (ETR:SAP) Price

When close to half the companies in the Software industry in Germany have price-to-sales ratios (or "P/S") below 2.2x, you may consider SAP SE (ETR:SAP) as a stock to avoid entirely with its 7.9x P/S ratio. 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 SAP

How SAP Has Been Performing

There hasn't been much to differentiate SAP's and the industry's revenue growth lately. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. 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 SAP.

Do Revenue Forecasts Match The High P/S Ratio?

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

If we review the last year of revenue growth, the company posted a worthy increase of 8.0%. The latest three year period has also seen a 21% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 11% per annum during the coming three years according to the analysts following the company. With the industry predicted to deliver 13% growth per year, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that SAP's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that SAP currently trades on a higher than expected P/S. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

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

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.