LZ Technology Holdings Limited's (NASDAQ:LZMH) Stock Retreats 42% But Revenues Haven't Escaped The Attention Of Investors

Unfortunately for some shareholders, the LZ Technology Holdings Limited (NASDAQ:LZMH) share price has dived 42% in the last thirty days, prolonging recent pain. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

In spite of the heavy fall in price, you could still be forgiven for thinking LZ Technology Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.5x, considering almost half the companies in the United States' Media industry have P/S ratios below 1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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See our latest analysis for LZ Technology Holdings

How LZ Technology Holdings Has Been Performing

LZ Technology Holdings certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on LZ Technology Holdings' earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For LZ Technology Holdings?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like LZ Technology Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 45% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 2.3% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why LZ Technology Holdings is trading at such a high P/S compared to the industry. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Key Takeaway

LZ Technology Holdings' shares may have suffered, but its P/S remains high. 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.

We've established that LZ Technology Holdings maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for LZ Technology Holdings that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.