Optimistic Investors Push Magnite, Inc. (NASDAQ:MGNI) Shares Up 29% But Growth Is Lacking

Magnite, Inc. (NASDAQ:MGNI) shareholders have had their patience rewarded with a 29% share price jump in the last month. The annual gain comes to 127% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in the United States' Media industry have price-to-sales ratios (or "P/S") below 1x, you may consider Magnite as a stock to avoid entirely with its 3.4x 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.

Check out our latest analysis for Magnite

How Magnite Has Been Performing

With revenue growth that's superior to most other companies of late, Magnite has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Magnite?

Magnite'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.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.7% last year. Pleasingly, revenue has also lifted 70% 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.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue growth is heading into negative territory, declining 0.4% over the next year. That's not great when the rest of the industry is expected to grow by 3.9%.

With this information, we find it concerning that Magnite is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.

The Bottom Line On Magnite's P/S

Shares in Magnite have seen a strong upwards swing lately, which has really helped boost its P/S figure. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Magnite currently trades on a much higher than expected P/S for a company whose revenues are forecast to decline. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. At these price levels, investors should remain cautious, particularly if things don't improve.

Having said that, be aware Magnite is showing 1 warning sign in our investment analysis, you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.