Some Shareholders Feeling Restless Over Arm Holdings plc's (NASDAQ:ARM) P/S Ratio

Arm Holdings plc's (NASDAQ:ARM) price-to-sales (or "P/S") ratio of 35.6x might make it look like a strong sell right now compared to the Semiconductor industry in the United States, where around half of the companies have P/S ratios below 4.1x and even P/S below 2x are quite common. 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 Arm Holdings

How Arm Holdings Has Been Performing

With revenue growth that's inferior to most other companies of late, Arm Holdings has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. 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 Arm Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 9.4% last year. The latest three year period has also seen an excellent 45% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 23% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 28% per year, which is noticeably more attractive.

In light of this, it's alarming that Arm Holdings' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

The Bottom Line On Arm Holdings' P/S

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 concluded that Arm Holdings currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Arm Holdings is showing 3 warning signs in our investment analysis, and 1 of those is potentially serious.

If these risks are making you reconsider your opinion on Arm Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.