Subdued Growth No Barrier To GCL Technology Holdings Limited (HKG:3800) With Shares Advancing 25%

GCL Technology Holdings Limited (HKG:3800) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 34% over that time.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about GCL Technology Holdings' P/S ratio of 0.9x, since the median price-to-sales (or "P/S") ratio for the Semiconductor industry in Hong Kong is also close to 1.3x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for GCL Technology Holdings

How GCL Technology Holdings Has Been Performing

While the industry has experienced revenue growth lately, GCL Technology Holdings' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

How Is GCL Technology Holdings' Revenue Growth Trending?

In order to justify its P/S ratio, GCL Technology Holdings would need to produce growth that's similar to 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 6.2%. Still, the latest three year period has seen an excellent 130% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 9.4% per year as estimated by the eleven analysts watching the company. That's shaping up to be materially lower than the 15% per year growth forecast for the broader industry.

With this in mind, we find it intriguing that GCL Technology Holdings' P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From GCL Technology Holdings' P/S?

Its shares have lifted substantially and now GCL Technology Holdings' P/S is back within range of the industry median. 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.

When you consider that GCL Technology Holdings' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

You always need to take note of risks, for example - GCL Technology Holdings has 2 warning signs we think you should be aware of.

If you're unsure about the strength of GCL Technology Holdings' 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.