Why Investors Shouldn't Be Surprised By Marcus & Millichap, Inc.'s (NYSE:MMI) 27% Share Price Surge

Marcus & Millichap, Inc. (NYSE:MMI) shares have continued their recent momentum with a 27% gain in the last month alone. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, it's still not a stretch to say that Marcus & Millichap's price-to-sales (or "P/S") ratio of 2.2x right now seems quite "middle-of-the-road" compared to the Real Estate industry in the United States, where the median P/S ratio is around 1.9x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Marcus & Millichap

What Does Marcus & Millichap's P/S Mean For Shareholders?

Marcus & Millichap hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. 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 Marcus & Millichap will help you uncover what's on the horizon.

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

Marcus & Millichap's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a frustrating 52% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 5.3% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 12% during the coming year according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 10.0%, which is not materially different.

With this information, we can see why Marcus & Millichap is trading at a fairly similar P/S to the industry. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

Marcus & Millichap's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Our look at Marcus & Millichap's revenue growth estimates show that its P/S is about what we expect, as both metrics follow closely with the industry averages. At this stage investors feel the potential for an improvement or deterioration in revenue isn't great enough to push P/S in a higher or lower direction. Unless these conditions change, they will continue to support the share price at these levels.

You should always think about risks. Case in point, we've spotted 2 warning signs for Marcus & Millichap you should be aware of, and 1 of them doesn't sit too well with us.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.