Optimistic Investors Push HG Semiconductor Limited (HKG:6908) Shares Up 26% But Growth Is Lacking

HG Semiconductor Limited (HKG:6908) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. But the last month did very little to improve the 67% share price decline over the last year.

After such a large jump in price, when almost half of the companies in Hong Kong's Semiconductor industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider HG Semiconductor as a stock not worth researching with its 4.2x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for HG Semiconductor

How HG Semiconductor Has Been Performing

It looks like revenue growth has deserted HG Semiconductor recently, which is not something to boast about. One possibility is that the P/S is high because investors think the benign revenue growth will improve to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for HG Semiconductor, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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 HG Semiconductor's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 27% overall from three years ago. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 13% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that HG Semiconductor's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On HG Semiconductor's P/S

The strong share price surge has lead to HG Semiconductor's P/S soaring as well. 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 HG Semiconductor currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 5 warning signs for HG Semiconductor (3 can't be ignored!) that you need to be mindful of.

If you're unsure about the strength of HG Semiconductor'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