There's Reason For Concern Over eBay Inc.'s (NASDAQ:EBAY) Massive 27% Price Jump

eBay Inc. (NASDAQ:EBAY) shareholders have had their patience rewarded with a 27% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 26%.

Since its price has surged higher, when almost half of the companies in the United States' Multiline Retail industry have price-to-sales ratios (or "P/S") below 1x, you may consider eBay as a stock probably not worth researching with its 2.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for eBay

What Does eBay's Recent Performance Look Like?

Recent times haven't been great for eBay as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. If not, then existing shareholders may be very nervous about the viability of the share price.

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

How Is eBay's Revenue Growth Trending?

In order to justify its P/S ratio, eBay would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.2% last year. Revenue has also lifted 14% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 2.4% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 13% per year, which is noticeably more attractive.

In light of this, it's alarming that eBay's P/S sits above the majority of other companies. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does eBay's P/S Mean For Investors?

eBay shares have taken a big step in a northerly direction, but its P/S is elevated as a result. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It comes as a surprise to see eBay trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

Before you settle on your opinion, we've discovered 3 warning signs for eBay (1 doesn't sit too well with us!) that you should be aware of.

If you're unsure about the strength of eBay's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.