Why Investors Shouldn't Be Surprised By RH's (NYSE:RH) 30% Share Price Surge

RH (NYSE:RH) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 32% in the last year.

After such a large jump in price, you could be forgiven for thinking RH is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 2.5x, considering almost half the companies in the United States' Specialty Retail industry have P/S ratios below 0.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for RH

How Has RH Performed Recently?

There hasn't been much to differentiate RH's and the industry's revenue growth lately. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think RH's future stacks up against the industry? In that case, our free report is a great place to start.

How Is RH's Revenue Growth Trending?

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

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 15% drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 12% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 5.4% per annum, which is noticeably less attractive.

With this in mind, it's not hard to understand why RH's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From RH's P/S?

Shares in RH have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that RH maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Specialty Retail industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Plus, you should also learn about these 6 warning signs we've spotted with RH (including 3 which are concerning).

If you're unsure about the strength of RH'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.