Optimistic Investors Push SoftBank Group Corp. (TSE:9984) Shares Up 28% But Growth Is Lacking

Despite an already strong run, SoftBank Group Corp. (TSE:9984) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 120% in the last year.

After such a large jump in price, given close to half the companies operating in Japan's Wireless Telecom industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider SoftBank Group as a stock to potentially avoid with its 3.8x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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See our latest analysis for SoftBank Group

What Does SoftBank Group's P/S Mean For Shareholders?

There hasn't been much to differentiate SoftBank Group's and the industry's revenue growth lately. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For SoftBank Group?

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

Retrospectively, the last year delivered a decent 6.7% gain to the company's revenues. Revenue has also lifted 17% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 5.5% per year as estimated by the analysts watching the company. That's shaping up to be similar to the 5.6% per year growth forecast for the broader industry.

With this information, we find it interesting that SoftBank Group is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What Does SoftBank Group's P/S Mean For Investors?

SoftBank Group shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Analysts are forecasting SoftBank Group's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

Before you take the next step, you should know about the 4 warning signs for SoftBank Group (3 don't sit too well with us!) that we have uncovered.

If these risks are making you reconsider your opinion on SoftBank Group, 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.