Backblaze, Inc.'s (NASDAQ:BLZE) 26% Price Boost Is Out Of Tune With Revenues

Backblaze, Inc. (NASDAQ:BLZE) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 17% over that time.

Even after such a large jump in price, it's still not a stretch to say that Backblaze's price-to-sales (or "P/S") ratio of 2.3x right now seems quite "middle-of-the-road" compared to the IT industry in the United States, where the median P/S ratio is around 2.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

We've discovered 3 warning signs about Backblaze. View them for free.

View our latest analysis for Backblaze

How Has Backblaze Performed Recently?

Backblaze could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. 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 Backblaze's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 85% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 14% during the coming year according to the seven analysts following the company. With the industry predicted to deliver 17% growth, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Backblaze's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Its shares have lifted substantially and now Backblaze's P/S is back within range of the industry median. 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.

When you consider that Backblaze's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Plus, you should also learn about these 3 warning signs we've spotted with Backblaze (including 1 which doesn't sit too well with us).

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.