Revenues Not Telling The Story For Silicon Laboratories Inc. (NASDAQ:SLAB) After Shares Rise 25%

Silicon Laboratories Inc. (NASDAQ:SLAB) shares have continued their recent momentum with a 25% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 37% in the last year.

Since its price has surged higher, Silicon Laboratories may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 7.6x, when you consider almost half of the companies in the Semiconductor industry in the United States have P/S ratios under 4x and even P/S lower than 1.8x aren't out of the ordinary. 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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Check out our latest analysis for Silicon Laboratories

What Does Silicon Laboratories' Recent Performance Look Like?

Recent times haven't been great for Silicon Laboratories as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio 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 Silicon Laboratories' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Silicon Laboratories' Revenue Growth Trending?

Silicon Laboratories' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.2% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 18% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 27% as estimated by the nine analysts watching the company. With the industry predicted to deliver 30% growth, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Silicon Laboratories is trading at a P/S higher than the industry. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Silicon Laboratories' P/S

Shares in Silicon Laboratories have seen a strong upwards swing lately, which has really helped boost its P/S figure. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It comes as a surprise to see Silicon Laboratories trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Silicon Laboratories, and understanding 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.