Investors Appear Satisfied With Amplitude, Inc.'s (NASDAQ:AMPL) Prospects

With a price-to-sales (or "P/S") ratio of 5.4x Amplitude, Inc. (NASDAQ:AMPL) may be sending bearish signals at the moment, given that almost half of all Software companies in the United States have P/S ratios under 4.2x and even P/S lower than 1.8x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Amplitude

What Does Amplitude's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Amplitude has been doing relatively well. 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 Amplitude will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Amplitude would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an exceptional 42% gain to the company's top line. Pleasingly, revenue has also lifted 248% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 23% per year during the coming three years according to the ten analysts following the company. That's shaping up to be materially higher than the 13% per year growth forecast for the broader industry.

With this information, we can see why Amplitude 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 Key Takeaway

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look into Amplitude shows that its P/S ratio remains high on the merit of its strong future revenues. 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.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Amplitude (1 is significant!) that you need to be mindful of.

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