With A 27% Price Drop For Sweetgreen, Inc. (NYSE:SG) You'll Still Get What You Pay For

Unfortunately for some shareholders, the Sweetgreen, Inc. (NYSE:SG) share price has dived 27% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 21% share price drop.

In spite of the heavy fall in price, given close to half the companies operating in the United States' Hospitality industry have price-to-sales ratios (or "P/S") below 1.5x, you may still consider Sweetgreen as a stock to potentially avoid with its 3.3x 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.

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View our latest analysis for Sweetgreen

How Has Sweetgreen Performed Recently?

There hasn't been much to differentiate Sweetgreen's and the industry's revenue growth lately. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Sweetgreen will help you uncover what's on the horizon.

How Is Sweetgreen's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Sweetgreen's is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. The latest three year period has also seen an excellent 99% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the twelve analysts covering the company suggest revenue should grow by 18% per year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 13% 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. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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

Despite the recent share price weakness, Sweetgreen's P/S remains higher than most other companies in the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look into Sweetgreen shows that its P/S ratio remains high on the merit of its strong future revenues. 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 always need to take note of risks, for example - Sweetgreen has 2 warning signs we think you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.