Clarivate Plc's (NYSE:CLVT) 27% Price Boost Is Out Of Tune With Revenues

The Clarivate Plc (NYSE:CLVT) share price has done very well over the last month, posting an excellent gain of 27%. Looking further back, the 13% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, when almost half of the companies in the United States' Professional Services industry have price-to-sales ratios (or "P/S") below 1.3x, you may consider Clarivate as a stock probably not worth researching with its 2.3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Clarivate

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

With revenue growth that's inferior to most other companies of late, Clarivate has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. If not, then existing shareholders may be very 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 Clarivate.

How Is Clarivate's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 3.0%. This was backed up an excellent period prior to see revenue up by 149% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 2.2% as estimated by the ten analysts watching the company. That's shaping up to be materially lower than the 6.9% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Clarivate's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Clarivate's P/S?

Clarivate's P/S is on the rise since its shares have risen strongly. 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 Clarivate 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Clarivate (at least 2 which shouldn't be ignored), and understanding these should be part of your investment process.

If you're unsure about the strength of Clarivate'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.