Planet Labs PBC (NYSE:PL) Stocks Shoot Up 38% But Its P/S Still Looks Reasonable

Planet Labs PBC (NYSE:PL) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. The last month tops off a massive increase of 190% in the last year.

Following the firm bounce in price, given around half the companies in the United States' Professional Services industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider Planet Labs PBC as a stock to avoid entirely with its 6.5x P/S ratio. 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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View our latest analysis for Planet Labs PBC

What Does Planet Labs PBC's Recent Performance Look Like?

There hasn't been much to differentiate Planet Labs PBC's and the industry's revenue growth lately. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. 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 Planet Labs PBC will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered a decent 9.5% gain to the company's revenues. Pleasingly, revenue has also lifted 79% 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 15% during the coming year according to the twelve analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 7.4%, which is noticeably less attractive.

With this information, we can see why Planet Labs PBC is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has lead to Planet Labs PBC's P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Planet Labs PBC 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. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Planet Labs PBC is showing 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored.

If these risks are making you reconsider your opinion on Planet Labs PBC, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.