XD Inc.'s (HKG:2400) 32% Price Boost Is Out Of Tune With Revenues

XD Inc. (HKG:2400) shares have continued their recent momentum with a 32% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 33% in the last year.

Following the firm bounce in price, given close to half the companies operating in Hong Kong's Entertainment industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider XD as a stock to potentially avoid with its 2.9x 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 as high as it is.

Check out our latest analysis for XD

What Does XD's Recent Performance Look Like?

XD could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on XD will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For XD?

XD's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 1.2%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 19% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue should grow by 17% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 18% each year, which is not materially different.

With this information, we find it interesting that XD is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Final Word

XD shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Analysts are forecasting XD's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for XD with six simple checks.

If you're unsure about the strength of XD's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com