Optimistic Investors Push Cafe24 Corp. (KOSDAQ:042000) Shares Up 69% But Growth Is Lacking

Cafe24 Corp. (KOSDAQ:042000) shares have continued their recent momentum with a 69% gain in the last month alone. The annual gain comes to 148% following the latest surge, making investors sit up and take notice.

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 3.4x, considering almost half the companies in Korea's IT industry have P/S ratios below 0.9x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Cafe24

What Does Cafe24's Recent Performance Look Like?

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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Cafe24's Revenue Growth Trending?

Cafe24's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.6% last year. The latest three year period has also seen a 7.6% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 8.2% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 8.3% per year, 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. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. 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. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. A positive change is needed in order to justify the current price-to-sales ratio.

You should always think about risks. Case in point, we've spotted 2 warning signs for Cafe24 you should be aware of, and 1 of them is potentially serious.

If you're unsure about the strength of Cafe24's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com