Revenues Not Telling The Story For GSI Technology, Inc. (NASDAQ:GSIT) After Shares Rise 68%

GSI Technology, Inc. (NASDAQ:GSIT) shares have continued their recent momentum with a 68% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 91% in the last year.

Since its price has surged higher, GSI Technology may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 7.3x, since almost half of all companies in the Semiconductor industry in the United States have P/S ratios under 4.4x and even P/S lower than 1.9x are not unusual. 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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See our latest analysis for GSI Technology

How Has GSI Technology Performed Recently?

For example, consider that GSI Technology's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on GSI Technology will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For GSI Technology?

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

Retrospectively, the last year delivered a frustrating 5.7% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 39% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 31% shows it's an unpleasant look.

With this in mind, we find it worrying that GSI Technology's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does GSI Technology's P/S Mean For Investors?

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

Our examination of GSI Technology revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 1 warning sign for GSI Technology that you need to take into consideration.

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

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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.