Why Investors Shouldn't Be Surprised By Appian Corporation's (NASDAQ:APPN) P/S

You may think that with a price-to-sales (or "P/S") ratio of 5.9x Appian Corporation (NASDAQ:APPN) is a stock to potentially avoid, seeing as almost half of all the Software companies in the United States have P/S ratios under 4.1x and even P/S lower than 1.9x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Appian

How Appian Has Been Performing

With revenue growth that's superior to most other companies of late, Appian has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. 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 Appian's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

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

If we review the last year of revenue growth, the company posted a terrific increase of 24%. The strong recent performance means it was also able to grow revenue by 75% 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.

Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 17% per annum over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 13% each year, which is noticeably less attractive.

With this in mind, it's not hard to understand why Appian's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Appian's P/S

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.

We've established that Appian maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It is also worth noting that we have found 2 warning signs for Appian that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.