Revenues Tell The Story For SiTime Corporation (NASDAQ:SITM) As Its Stock Soars 25%

Despite an already strong run, SiTime Corporation (NASDAQ:SITM) shares have been powering on, with a gain of 25% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 60% in the last year.

Following the firm bounce in price, SiTime's price-to-sales (or "P/S") ratio of 32.5x might make it look like a strong sell right now compared to other companies in the Semiconductor industry in the United States, where around half of the companies have P/S ratios below 5.5x and even P/S below 2x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for SiTime

How Has SiTime Performed Recently?

SiTime certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For SiTime?

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

If we review the last year of revenue growth, the company posted a terrific increase of 59%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 5.7% drop in revenue in aggregate. 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 seven analysts covering the company suggest revenue should grow by 33% per annum 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

SiTime's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of SiTime's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with SiTime, and understanding these should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.