Why Investors Shouldn't Be Surprised By Grid Dynamics Holdings, Inc.'s (NASDAQ:GDYN) P/S

Grid Dynamics Holdings, Inc.'s (NASDAQ:GDYN) price-to-sales (or "P/S") ratio of 2.8x may not look like an appealing investment opportunity when you consider close to half the companies in the IT industry in the United States have P/S ratios below 2x. 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 Grid Dynamics Holdings

How Has Grid Dynamics Holdings Performed Recently?

While the industry has experienced revenue growth lately, Grid Dynamics Holdings' revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 2.0%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 165% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 11% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 8.5%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Grid Dynamics Holdings' 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 Grid Dynamics Holdings' P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our look into Grid Dynamics Holdings shows that its P/S ratio remains high on the merit of its strong future revenues. 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.

Before you take the next step, you should know about the 1 warning sign for Grid Dynamics Holdings that we have uncovered.

If these risks are making you reconsider your opinion on Grid Dynamics Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

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