Zhihu Inc. (NYSE:ZH) Surges 27% Yet Its Low P/S Is No Reason For Excitement

The Zhihu Inc. (NYSE:ZH) share price has done very well over the last month, posting an excellent gain of 27%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.0% over the last year.

In spite of the firm bounce in price, Zhihu may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.7x, considering almost half of all companies in the Interactive Media and Services industry in the United States have P/S ratios greater than 1.3x and even P/S higher than 4x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Zhihu

How Has Zhihu Performed Recently?

Zhihu could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

How Is Zhihu's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Zhihu's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 7.1% decrease to the company's top line. Still, the latest three year period has seen an excellent 58% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 3.4% per annum as estimated by the seven analysts watching the company. That's not great when the rest of the industry is expected to grow by 12% per year.

With this in consideration, we find it intriguing that Zhihu's P/S is closely matching its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

The latest share price surge wasn't enough to lift Zhihu's P/S close to the industry median. 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.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Zhihu's P/S is on the lower end of the spectrum. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Zhihu with six simple checks.

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