StepStone Group Inc.'s (NASDAQ:STEP) Price In Tune With Revenues

When you see that almost half of the companies in the Capital Markets industry in the United States have price-to-sales ratios (or "P/S") below 3.4x, StepStone Group Inc. (NASDAQ:STEP) looks to be giving off strong sell signals with its 6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for StepStone Group

What Does StepStone Group's P/S Mean For Shareholders?

StepStone Group certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. 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 StepStone Group will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

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

If we review the last year of revenue growth, the company posted a terrific increase of 49%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 33% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 20% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 9.2%, which is noticeably less attractive.

With this in mind, it's not hard to understand why StepStone Group's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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.

As we suspected, our examination of StepStone Group's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. 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 4 warning signs for StepStone Group (2 are a bit concerning!) that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.