Byte Metaverse Holdings Limited (HKG:8645) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

Byte Metaverse Holdings Limited (HKG:8645) shares have had a really impressive month, gaining 26% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.0% in the last twelve months.

Since its price has surged higher, given around half the companies in Hong Kong's IT industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider Byte Metaverse Holdings as a stock to avoid entirely with its 4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

We've discovered 2 warning signs about Byte Metaverse Holdings. View them for free.

View our latest analysis for Byte Metaverse Holdings

What Does Byte Metaverse Holdings' Recent Performance Look Like?

Byte Metaverse Holdings has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Byte Metaverse Holdings?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Byte Metaverse Holdings' to be considered reasonable.

Retrospectively, the last year delivered a decent 4.1% gain to the company's revenues. Pleasingly, revenue has also lifted 32% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 8.4% shows it's about the same on an annualised basis.

In light of this, it's curious that Byte Metaverse Holdings' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Byte Metaverse Holdings' P/S

Shares in Byte Metaverse Holdings have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Our look into Byte Metaverse Holdings has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 2 warning signs for Byte Metaverse Holdings (1 is a bit unpleasant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Byte Metaverse 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.