Why Investors Shouldn't Be Surprised By Iris Energy Limited's (NASDAQ:IREN) 29% Share Price Surge

Iris Energy Limited (NASDAQ:IREN) shareholders are no doubt pleased to see that the share price has bounced 29% in the last month, although it is still struggling to make up recently lost ground. The last month tops off a massive increase of 151% in the last year.

Following the firm bounce in price, Iris Energy may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 8.7x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 4.6x and even P/S lower than 1.9x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Iris Energy

How Iris Energy Has Been Performing

Recent times have been advantageous for Iris Energy as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Iris Energy will help you uncover what's on the horizon.

How Is Iris Energy's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 150% 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. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 79% per year during the coming three years according to the nine analysts following the company. With the industry only predicted to deliver 19% per year, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Iris Energy'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.

The Key Takeaway

The strong share price surge has lead to Iris Energy's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Iris Energy maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Iris Energy (1 makes us a bit uncomfortable!) that you need to be mindful of.

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.