Vertiv Holdings Co's (NYSE:VRT) 26% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Vertiv Holdings Co (NYSE:VRT) shares have been powering on, with a gain of 26% in the last thirty days. The last month tops off a massive increase of 224% in the last year.

After such a large jump in price, you could be forgiven for thinking Vertiv Holdings Co is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7x, considering almost half the companies in the United States' Electrical industry have P/S ratios below 1.9x. 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 Vertiv Holdings Co

How Vertiv Holdings Co Has Been Performing

Vertiv Holdings Co's revenue growth of late has been pretty similar to most other companies. 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.

Want the full picture on analyst estimates for the company? Then our free report on Vertiv Holdings Co will help you uncover what's on the horizon.

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

In order to justify its P/S ratio, Vertiv Holdings Co would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 13% gain to the company's revenues. Pleasingly, revenue has also lifted 54% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 14% each year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 28% per year growth forecast for the broader industry.

With this information, we find it concerning that Vertiv Holdings Co is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Vertiv Holdings Co's P/S Mean For Investors?

The strong share price surge has lead to Vertiv Holdings Co's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

It comes as a surprise to see Vertiv Holdings Co trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Vertiv Holdings Co has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Vertiv Holdings Co'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.