Youzan Technology Limited (HKG:8083) Stock Rockets 32% As Investors Are Less Pessimistic Than Expected

Youzan Technology Limited (HKG:8083) shareholders have had their patience rewarded with a 32% 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 18% over that time.

Following the firm bounce in price, when almost half of the companies in Hong Kong's Software industry have price-to-sales ratios (or "P/S") below 1.3x, you may consider Youzan Technology as a stock probably not worth researching with its 2x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Youzan Technology

How Youzan Technology Has Been Performing

Youzan Technology 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as high as Youzan Technology's is when the company's growth is on track to outshine 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 5.5%. This means it has also seen a slide in revenue over the longer-term as revenue is down 22% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 0.5% as estimated by the dual analysts watching the company. That's shaping up to be materially lower than the 24% growth forecast for the broader industry.

In light of this, it's alarming that Youzan Technology's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Youzan Technology's P/S Mean For Investors?

Youzan Technology's P/S is on the rise since its shares have risen strongly. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Youzan Technology, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.