Investors Appear Satisfied With Youdao, Inc.'s (NYSE:DAO) Prospects As Shares Rocket 27%

Youdao, Inc. (NYSE:DAO) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 50%.

Although its price has surged higher, there still wouldn't be many who think Youdao's price-to-sales (or "P/S") ratio of 0.9x is worth a mention when the median P/S in the United States' Consumer Services industry is similar at about 1.3x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Youdao

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

Youdao could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Youdao's Revenue Growth Trending?

In order to justify its P/S ratio, Youdao would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 7.5% gain to the company's revenues. Pleasingly, revenue has also lifted 68% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next year should generate growth of 11% as estimated by the seven analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 13%, which is not materially different.

With this information, we can see why Youdao is trading at a fairly similar P/S to the industry. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

What Does Youdao's P/S Mean For Investors?

Youdao appears to be back in favour with a solid price jump bringing its P/S back in line with 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.

We've seen that Youdao maintains an adequate P/S seeing as its revenue growth figures match the rest of the industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. If all things remain constant, the possibility of a drastic share price movement remains fairly remote.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Youdao (2 are a bit unpleasant!) that you need to be mindful of.

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