Risks To Shareholder Returns Are Elevated At These Prices For CoStar Group, Inc. (NASDAQ:CSGP)

When close to half the companies in the Real Estate industry in the United States have price-to-sales ratios (or "P/S") below 2x, you may consider CoStar Group, Inc. (NASDAQ:CSGP) as a stock to avoid entirely with its 12x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for CoStar Group

What Does CoStar Group's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, CoStar Group has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on CoStar Group will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

If we review the last year of revenue growth, the company posted a worthy increase of 11%. Pleasingly, revenue has also lifted 41% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 13% each year during the coming three years according to the three analysts following the company. That's shaping up to be similar to the 12% per year growth forecast for the broader industry.

With this in consideration, we find it intriguing that CoStar Group'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 CoStar Group's P/S

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.

Analysts are forecasting CoStar Group's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with CoStar Group, and understanding should be part of your investment process.

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