There's Reason For Concern Over Cafe24 Corp.'s (KOSDAQ:042000) Massive 69% Price Jump

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.

Following the firm bounce in price, given around half the companies in Korea's IT industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider Cafe24 as a stock to avoid entirely with its 3.4x 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 so lofty.

View our latest analysis for Cafe24

What Does Cafe24's P/S Mean For Shareholders?

Cafe24 certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. The P/S ratio is probably high because investors think the company will continue to navigate the broader industry headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Cafe24'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 Cafe24?

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. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 8.2% per annum over the next three years. With the industry predicted to deliver 8.3% growth per year, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Cafe24's P/S is higher than its industry peers. 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.

What Does Cafe24's P/S Mean For Investors?

Cafe24's P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given Cafe24's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. 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. A positive change is needed in order to justify the current price-to-sales ratio.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Cafe24 (1 is a bit concerning) you should be aware of.

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