Innodata Inc. (NASDAQ:INOD) Stocks Shoot Up 26% But Its P/S Still Looks Reasonable

Despite an already strong run, Innodata Inc. (NASDAQ:INOD) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days were the cherry on top of the stock's 371% gain in the last year, which is nothing short of spectacular.

After such a large jump in price, you could be forgiven for thinking Innodata is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 11.6x, considering almost half the companies in the United States' Professional Services industry have P/S ratios below 1.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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See our latest analysis for Innodata

How Has Innodata Performed Recently?

With revenue growth that's superior to most other companies of late, Innodata has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

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

Innodata'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.

If we review the last year of revenue growth, the company posted a terrific increase of 113%. The strong recent performance means it was also able to grow revenue by 193% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 21% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 6.9%, which is noticeably less attractive.

In light of this, it's understandable that Innodata's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Innodata's P/S

The strong share price surge has lead to Innodata's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Innodata maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Professional Services industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Innodata is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored.

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.