Market Participants Recognise Sweetgreen, Inc.'s (NYSE:SG) Revenues Pushing Shares 38% Higher

Sweetgreen, Inc. (NYSE:SG) shares have continued their recent momentum with a 38% gain in the last month alone. The last month tops off a massive increase of 251% in the last year.

Since its price has surged higher, given around half the companies in the United States' Hospitality industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider Sweetgreen as a stock to avoid entirely with its 5.8x 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.

View our latest analysis for Sweetgreen

How Has Sweetgreen Performed Recently?

With revenue growth that's inferior to most other companies of late, Sweetgreen 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Sweetgreen's Revenue Growth Trending?

In order to justify its P/S ratio, Sweetgreen would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 25% last year. The latest three year period has also seen an excellent 169% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 17% per year as estimated by the nine analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 12% per annum, which is noticeably less attractive.

With this information, we can see why Sweetgreen 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 Sweetgreen's P/S soaring as well. 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.

Our look into Sweetgreen shows that its P/S ratio remains high on the merit of its strong future revenues. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Sweetgreen, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Sweetgreen, 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.