Why Investors Shouldn't Be Surprised By Applied Digital Corporation's (NASDAQ:APLD) 28% Share Price Surge

Despite an already strong run, Applied Digital Corporation (NASDAQ:APLD) shares have been powering on, with a gain of 28% in the last thirty days. The last 30 days were the cherry on top of the stock's 338% gain in the last year, which is nothing short of spectacular.

Since its price has surged higher, when almost half of the companies in the United States' IT industry have price-to-sales ratios (or "P/S") below 2.4x, you may consider Applied Digital as a stock not worth researching with its 29x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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View our latest analysis for Applied Digital

How Applied Digital Has Been Performing

Applied Digital could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

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

How Is Applied Digital's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 5.5% gain to the company's revenues. While this performance is only fair, the company was still able to deliver immense revenue growth over the last three years. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 74% per annum during the coming three years according to the eight analysts following the company. That's shaping up to be materially higher than the 20% per annum 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. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Applied Digital's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 Applied Digital shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Applied Digital is showing 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored.

If you're unsure about the strength of Applied Digital's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.