Coolpad Group Limited (HKG:2369) Stock Rockets 27% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Coolpad Group Limited (HKG:2369) shares have been powering on, with a gain of 27% in the last thirty days. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

In spite of the firm bounce in price, it's still not a stretch to say that Coolpad Group's price-to-sales (or "P/S") ratio of 1.2x right now seems quite "middle-of-the-road" compared to the Tech industry in Hong Kong, where the median P/S ratio is around 1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Coolpad Group

How Has Coolpad Group Performed Recently?

Revenue has risen firmly for Coolpad Group recently, which is pleasing to see. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Coolpad Group's earnings, revenue and cash flow.

How Is Coolpad Group's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Coolpad Group's to be considered reasonable.

Retrospectively, the last year delivered a decent 8.6% gain to the company's revenues. Still, lamentably revenue has fallen 13% in aggregate from three years ago, which is disappointing. 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 17% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Coolpad Group is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What We Can Learn From Coolpad Group's P/S?

Its shares have lifted substantially and now Coolpad Group's 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.

We find it unexpected that Coolpad Group trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 4 warning signs for Coolpad Group you should be aware of, and 2 of them are concerning.

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.