Subdued Growth No Barrier To Xponential Fitness, Inc. (NYSE:XPOF) With Shares Advancing 27%

Xponential Fitness, Inc. (NYSE:XPOF) shares have continued their recent momentum with a 27% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 40% in the last year.

Although its price has surged higher, there still wouldn't be many who think Xponential Fitness' price-to-sales (or "P/S") ratio of 1.6x is worth a mention when the median P/S in the United States' Hospitality industry is similar at about 1.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Xponential Fitness

What Does Xponential Fitness' P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Xponential Fitness has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

How Is Xponential Fitness' Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Xponential Fitness' is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 9.0% gain to the company's revenues. Pleasingly, revenue has also lifted 145% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 7.8% per year during the coming three years according to the ten analysts following the company. That's shaping up to be materially lower than the 13% per year growth forecast for the broader industry.

In light of this, it's curious that Xponential Fitness' P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Xponential Fitness' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Given that Xponential Fitness' revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Xponential Fitness (of which 1 makes us a bit uncomfortable!) you should know about.

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.