Cafe24 Corp. (KOSDAQ:042000) Stock Rockets 30% As Investors Are Less Pessimistic Than Expected

Cafe24 Corp. (KOSDAQ:042000) shares have continued their recent momentum with a 30% gain in the last month alone. The last month tops off a massive increase of 180% in the last year.

After such a large jump in price, you could be forgiven for thinking Cafe24 is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.1x, considering almost half the companies in Korea's IT industry have P/S ratios below 0.8x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Cafe24

How Has Cafe24 Performed Recently?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Cafe24 has been doing quite well of late. It seems that many are expecting the company to continue defying the broader industry adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Cafe24.

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as steep as Cafe24's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.6% last year. The solid recent performance means it was also able to grow revenue by 7.6% in total over the last three years. 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 9.9% per year as estimated by the dual analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 8.5% per annum, which is not materially different.

With this information, we find it interesting that Cafe24 is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Bottom Line On Cafe24's P/S

The strong share price surge has lead to Cafe24's P/S soaring as well. 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 Cafe24's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 2 warning signs we've spotted with Cafe24 (including 1 which makes us a bit uncomfortable).

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.