What indie Semiconductor, Inc.'s (NASDAQ:INDI) 28% Share Price Gain Is Not Telling You

Those holding indie Semiconductor, Inc. (NASDAQ:INDI) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 27% over that time.

Although its price has surged higher, it's still not a stretch to say that indie Semiconductor's price-to-sales (or "P/S") ratio of 4.7x right now seems quite "middle-of-the-road" compared to the Semiconductor industry in the United States, where the median P/S ratio is around 4.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for indie Semiconductor

How indie Semiconductor Has Been Performing

With revenue growth that's superior to most other companies of late, indie Semiconductor has been doing relatively well. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

How Is indie Semiconductor's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like indie Semiconductor's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 82%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 26% during the coming year according to the eight analysts following the company. That's shaping up to be materially lower than the 48% growth forecast for the broader industry.

With this information, we find it interesting that indie Semiconductor is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

indie Semiconductor appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

When you consider that indie Semiconductor's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for indie Semiconductor that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.