What GCL Technology Holdings Limited's (HKG:3800) 39% Share Price Gain Is Not Telling You

GCL Technology Holdings Limited (HKG:3800) shareholders have had their patience rewarded with a 39% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 19% over that time.

Even after such a large jump in price, it's still not a stretch to say that GCL Technology Holdings' price-to-sales (or "P/S") ratio of 1.1x right now seems quite "middle-of-the-road" compared to the Semiconductor industry in Hong Kong, where the median P/S ratio is around 1.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for GCL Technology Holdings

How Has GCL Technology Holdings Performed Recently?

GCL Technology Holdings could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like GCL Technology Holdings' is when the company's growth is tracking the industry closely.

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%. Even so, admirably revenue has lifted 130% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 5.8% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 15% each year growth forecast for the broader industry.

In light of this, it's curious that GCL Technology Holdings' P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. 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. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Given that GCL Technology Holdings' revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Plus, you should also learn about these 2 warning signs we've spotted with GCL Technology Holdings (including 1 which is potentially serious).

If these risks are making you reconsider your opinion on GCL Technology Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.