Why Investors Shouldn't Be Surprised By American Superconductor Corporation's (NASDAQ:AMSC) 28% Share Price Surge

Those holding American Superconductor Corporation (NASDAQ:AMSC) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The last month tops off a massive increase of 248% in the last year.

After such a large jump in price, when almost half of the companies in the United States' Electrical industry have price-to-sales ratios (or "P/S") below 1.8x, you may consider American Superconductor as a stock not worth researching with its 6.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for American Superconductor

What Does American Superconductor's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, American Superconductor has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. 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 American Superconductor.

How Is American Superconductor's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 37%. Pleasingly, revenue has also lifted 70% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 39% over the next year. That's shaping up to be materially higher than the 12% growth forecast for the broader industry.

In light of this, it's understandable that American Superconductor's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

American Superconductor's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

As we suspected, our examination of American Superconductor's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - American Superconductor has 2 warning signs we think you should be aware of.

If you're unsure about the strength of American Superconductor'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.