AppFolio, Inc.'s (NASDAQ:APPF) Shares Climb 25% But Its Business Is Yet to Catch Up

AppFolio, Inc. (NASDAQ:APPF) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 34%.

After such a large jump in price, AppFolio may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 12.3x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 5.6x and even P/S lower than 1.9x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for AppFolio

What Does AppFolio's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, AppFolio has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For AppFolio?

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

If we review the last year of revenue growth, the company posted a terrific increase of 33%. The strong recent performance means it was also able to grow revenue by 127% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 17% as estimated by the seven analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 27%, which is noticeably more attractive.

With this information, we find it concerning that AppFolio is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

The strong share price surge has lead to AppFolio's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've concluded that AppFolio currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. 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 AppFolio, and understanding should be part of your investment process.

If you're unsure about the strength of AppFolio'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.