Why We're Not Concerned Yet About IREN Limited's (NASDAQ:IREN) 29% Share Price Plunge

Unfortunately for some shareholders, the IREN Limited (NASDAQ:IREN) share price has dived 29% in the last thirty days, prolonging recent pain. Still, a bad month hasn't completely ruined the past year with the stock gaining 42%, which is great even in a bull market.

In spite of the heavy fall in price, IREN's price-to-sales (or "P/S") ratio of 5.8x might still make it look like a sell right now compared to the wider Software industry in the United States, where around half of the companies have P/S ratios below 4.6x and even P/S below 1.9x are quite common. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for IREN

What Does IREN's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, IREN has been doing relatively well. 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.

Is There Enough Revenue Growth Forecasted For IREN?

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

Taking a look back first, we see that the company grew revenue by an impressive 133% last year. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 80% each year as estimated by the eleven analysts watching the company. With the industry only predicted to deliver 20% per year, the company is positioned for a stronger revenue result.

In light of this, it's understandable that IREN's 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 Does IREN's P/S Mean For Investors?

IREN's P/S remain high even after its stock plunged. 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.

As we suspected, our examination of IREN's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. 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.

It is also worth noting that we have found 2 warning signs for IREN (1 doesn't sit too well with us!) that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.