Vertiv Holdings Co's (NYSE:VRT) Shares Climb 26% But Its Business Is Yet to Catch Up

Vertiv Holdings Co (NYSE:VRT) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 181% following the latest surge, making investors sit up and take notice.

Following the firm bounce 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 7.4x, considering almost half the companies in the United States' Electrical industry have P/S ratios below 2x. 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 Vertiv Holdings Co

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

Recent revenue growth for Vertiv Holdings Co has been in line with the industry. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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.

Do Revenue Forecasts Match The High P/S Ratio?

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.

If we review the last year of revenue growth, the company posted a worthy increase of 13%. The latest three year period has also seen an excellent 54% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 15% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 24% per annum, which is noticeably more attractive.

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 We Can Learn From Vertiv Holdings Co's P/S?

The strong share price surge has lead to Vertiv Holdings Co'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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Vertiv Holdings Co, this doesn't appear to be impacting the P/S in the slightest. 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. At these price levels, investors should remain cautious, particularly if things don't improve.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Vertiv Holdings Co that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.