TeamSpirit Inc. (TSE:4397) Soars 29% But It's A Story Of Risk Vs Reward

TeamSpirit Inc. (TSE:4397) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 16% over that time.

Although its price has surged higher, TeamSpirit's price-to-sales (or "P/S") ratio of 1.5x might still make it look like a buy right now compared to the Software industry in Japan, where around half of the companies have P/S ratios above 2x and even P/S above 4x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for TeamSpirit

How TeamSpirit Has Been Performing

Revenue has risen firmly for TeamSpirit recently, which is pleasing to see. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on TeamSpirit will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For TeamSpirit?

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

Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 52% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that to the industry, which is only predicted to deliver 13% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this in mind, we find it intriguing that TeamSpirit's P/S isn't as high compared to that of its industry peers. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

Despite TeamSpirit's share price climbing recently, its P/S still lags most other companies. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We're very surprised to see TeamSpirit currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

Before you settle on your opinion, we've discovered 2 warning signs for TeamSpirit (1 makes us a bit uncomfortable!) that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.