With A 39% Price Drop For Planet Labs PBC (NYSE:PL) You'll Still Get What You Pay For

Planet Labs PBC (NYSE:PL) shares have had a horrible month, losing 39% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 65% in the last year.

In spite of the heavy fall in price, given around half the companies 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 avoid entirely with its 4.5x P/S ratio. 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 Planet Labs PBC

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

Recent times have been advantageous for Planet Labs PBC as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. 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?

Planet Labs PBC'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.

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 94% 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 twelve analysts covering the company suggest revenue should grow by 10% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 7.0%, 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.

What We Can Learn From Planet Labs PBC's P/S?

Even after such a strong price drop, Planet Labs PBC's P/S still exceeds the industry median significantly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Before you settle on your opinion, we've discovered 2 warning signs for Planet Labs PBC 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.