Why Investors Shouldn't Be Surprised By Applied Digital Corporation's (NASDAQ:APLD) 63% Share Price Surge

Applied Digital Corporation (NASDAQ:APLD) shareholders are no doubt pleased to see that the share price has bounced 63% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 53%.

Following the firm bounce in price, when almost half of the companies in the United States' IT industry have price-to-sales ratios (or "P/S") below 2.6x, you may consider Applied Digital as a stock not worth researching with its 5.7x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Our free stock report includes 3 warning signs investors should be aware of before investing in Applied Digital. Read for free now.

See our latest analysis for Applied Digital

What Does Applied Digital's P/S Mean For Shareholders?

Recent times have been advantageous for Applied Digital as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Applied Digital's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Applied Digital?

The only time you'd be truly comfortable seeing a P/S as steep as Applied Digital's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 54% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 25% as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 15% growth forecast for the broader industry.

In light of this, it's understandable that Applied Digital's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Shares in Applied Digital have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Applied Digital maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the IT industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Applied Digital (of which 2 make us uncomfortable!) you should know about.

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