GDS Holdings Limited's (NASDAQ:GDS) Shares Climb 31% But Its Business Is Yet to Catch Up

GDS Holdings Limited (NASDAQ:GDS) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. The last month tops off a massive increase of 237% in the last year.

Since its price has surged higher, given close to half the companies operating in the United States' IT industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider GDS Holdings as a stock to potentially avoid with its 3.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

We've discovered 1 warning sign about GDS Holdings. View them for free.

See our latest analysis for GDS Holdings

What Does GDS Holdings' Recent Performance Look Like?

Recent times haven't been great for GDS Holdings as its revenue has been rising slower than most other companies. 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.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on GDS Holdings.

Do Revenue Forecasts Match The High P/S Ratio?

GDS Holdings' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.5% last year. This was backed up an excellent period prior to see revenue up by 32% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 13% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 17% per year, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that GDS Holdings' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

The large bounce in GDS Holdings' shares has lifted the company's P/S handsomely. 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.

It comes as a surprise to see GDS Holdings trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for GDS Holdings that you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.