The Price Is Right For Planet Labs PBC (NYSE:PL) Even After Diving 25%

Planet Labs PBC (NYSE:PL) shares have had a horrible month, losing 25% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 58% share price decline.

Even after such a large drop in price, given close to half the companies operating in the United States' Professional Services industry have price-to-sales ratios (or "P/S") below 1.3x, you may still consider Planet Labs PBC as a stock to potentially avoid with its 2.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Planet Labs PBC

How Planet Labs PBC Has Been Performing

Planet Labs PBC certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Planet Labs PBC's future stacks up against the industry? In that case, our free report is a great place to start.

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

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

Taking a look back first, we see that the company grew revenue by an impressive 15% last year. The latest three year period has also seen an excellent 95% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 21% per annum over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 7.1% each year, 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. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Planet Labs PBC's P/S Mean For Investors?

Despite the recent share price weakness, Planet Labs PBC's P/S remains higher than most other companies in the industry. 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.

As we suspected, our examination of Planet Labs PBC's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Planet Labs PBC you should be aware of.

If you're unsure about the strength of Planet Labs PBC'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.