Ambarella, Inc.'s (NASDAQ:AMBA) 30% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Ambarella, Inc. (NASDAQ:AMBA) shares have been powering on, with a gain of 30% in the last thirty days. The last 30 days bring the annual gain to a very sharp 53%.

Since its price has surged higher, Ambarella may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 11.6x, when you consider almost half of the companies in the Semiconductor industry in the United States have P/S ratios under 4.8x and even P/S lower than 2x 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 so lofty.

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Check out our latest analysis for Ambarella

How Ambarella Has Been Performing

With revenue growth that's superior to most other companies of late, Ambarella has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Ambarella?

In order to justify its P/S ratio, Ambarella would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 58% last year. Still, revenue has fallen 1.6% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 15% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 26% per annum, which is noticeably more attractive.

With this information, we find it concerning that Ambarella is trading at a P/S higher than the industry. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

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

The strong share price surge has lead to Ambarella's P/S soaring as well. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Ambarella, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

You should always think about risks. Case in point, we've spotted 2 warning signs for Ambarella you should be aware of.

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