Why Investors Shouldn't Be Surprised By Penumbra, Inc.'s (NYSE:PEN) P/S

When you see that almost half of the companies in the Medical Equipment industry in the United States have price-to-sales ratios (or "P/S") below 2.8x, Penumbra, Inc. (NYSE:PEN) looks to be giving off strong sell signals with its 8.4x 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.

We've discovered 2 warning signs about Penumbra. View them for free.

Check out our latest analysis for Penumbra

What Does Penumbra's Recent Performance Look Like?

There hasn't been much to differentiate Penumbra'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. 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 Penumbra.

Is There Enough Revenue Growth Forecasted For Penumbra?

Penumbra's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 13%. This was backed up an excellent period prior to see revenue up by 59% in total over the last three years. 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 13% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 10% per annum, which is noticeably less attractive.

With this information, we can see why Penumbra 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

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 Penumbra's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Penumbra has 2 warning signs we think you should be aware of.

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