Revenues Tell The Story For SiTime Corporation (NASDAQ:SITM) As Its Stock Soars 26%

SiTime Corporation (NASDAQ:SITM) shares have continued their recent momentum with a 26% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

After such a large jump in price, SiTime may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 25.6x, since almost half of all companies in the Semiconductor industry in the United States have P/S ratios under 5.1x and even P/S lower than 2x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for SiTime

What Does SiTime's Recent Performance Look Like?

SiTime hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. 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 SiTime's future stacks up against the industry? In that case, our free report is a great place to start.

How Is SiTime's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 45% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 6.7% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 32% per year over the next three years. That's shaping up to be materially higher than the 27% per year growth forecast for the broader industry.

With this information, we can see why SiTime is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On SiTime's P/S

The strong share price surge has lead to SiTime'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.

As we suspected, our examination of SiTime's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with SiTime, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on SiTime, 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.

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