IREN Limited (NASDAQ:IREN) Shares Slammed 30% But Getting In Cheap Might Be Difficult Regardless

The IREN Limited (NASDAQ:IREN) share price has softened a substantial 30% over the previous 30 days, handing back much of the gains the stock has made lately. The good news is that in the last year, the stock has shone bright like a diamond, gaining 228%.

In spite of the heavy fall in price, IREN's price-to-sales (or "P/S") ratio of 19.1x might still make it look like a strong sell right now compared to other companies in the Software industry in the United States, where around half of the companies have P/S ratios below 5x and even P/S below 2x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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See our latest analysis for IREN

What Does IREN's P/S Mean For Shareholders?

IREN certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little 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 IREN.

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

In order to justify its P/S ratio, IREN would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 235% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 72% per year over the next three years. That's shaping up to be materially higher than the 31% per annum growth forecast for the broader industry.

With this in mind, it's not hard to understand why IREN's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

IREN's shares may have suffered, but its P/S remains high. 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.

As we suspected, our examination of IREN's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You need to take note of risks, for example - IREN has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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

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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.