Optimistic Investors Push SK hynix Inc. (KRX:000660) Shares Up 26% But Growth Is Lacking

SK hynix Inc. (KRX:000660) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 114% in the last year.

Following the firm bounce in price, when almost half of the companies in Korea's Semiconductor industry have price-to-sales ratios (or "P/S") below 1.7x, you may consider SK hynix as a stock probably not worth researching with its 3.1x 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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Check out our latest analysis for SK hynix

What Does SK hynix's Recent Performance Look Like?

There hasn't been much to differentiate SK hynix'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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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Is There Enough Revenue Growth Forecasted For SK hynix?

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

Retrospectively, the last year delivered an exceptional 57% gain to the company's top line. The latest three year period has also seen an excellent 54% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 8.9% per year as estimated by the analysts watching the company. With the industry predicted to deliver 9.9% growth per annum, the company is positioned for a comparable revenue result.

In light of this, it's curious that SK hynix's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

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

Given SK hynix's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for SK hynix with six simple checks will allow you to discover any risks that could be an issue.

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.