With A 30% Price Drop For Grid Dynamics Holdings, Inc. (NASDAQ:GDYN) You'll Still Get What You Pay For

Grid Dynamics Holdings, Inc. (NASDAQ:GDYN) shares have had a horrible month, losing 30% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 35% in the last year.

In spite of the heavy fall in price, you could still be forgiven for thinking Grid Dynamics Holdings is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4x, considering almost half the companies in the United States' IT industry have P/S ratios below 2.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Grid Dynamics Holdings

What Does Grid Dynamics Holdings' Recent Performance Look Like?

Grid Dynamics Holdings certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Grid Dynamics Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Grid Dynamics Holdings?

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, we see that the company managed to grow revenues by a handy 12% last year. The latest three year period has also seen an excellent 66% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 19% per year during the coming three years according to the five analysts following the company. With the industry only predicted to deliver 12% per year, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Grid Dynamics Holdings' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Grid Dynamics Holdings' P/S?

Despite the recent share price weakness, Grid Dynamics Holdings' P/S remains higher than most other companies in the industry. 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.

We've established that Grid Dynamics Holdings maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the IT industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Grid Dynamics Holdings you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.