Subdued Growth No Barrier To Spotify Technology S.A. (NYSE:SPOT) With Shares Advancing 28%

Spotify Technology S.A. (NYSE:SPOT) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. The annual gain comes to 115% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given around half the companies in the United States' Entertainment industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider Spotify Technology as a stock to avoid entirely with its 7.2x 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.

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View our latest analysis for Spotify Technology

How Spotify Technology Has Been Performing

Recent times have been advantageous for Spotify Technology as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Spotify Technology.

How Is Spotify Technology's Revenue Growth Trending?

In order to justify its P/S ratio, Spotify Technology would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 17% gain to the company's top line. Pleasingly, revenue has also lifted 59% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 14% per annum over the next three years. With the industry predicted to deliver 12% growth per annum, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Spotify Technology's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Bottom Line On Spotify Technology's P/S

Shares in Spotify Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Given Spotify Technology's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. A positive change is needed in order to justify the current price-to-sales ratio.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Spotify Technology with six simple checks on some of these key factors.

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