Kingsoft Cloud Holdings Limited (NASDAQ:KC) Shares May Have Slumped 27% But Getting In Cheap Is Still Unlikely

The Kingsoft Cloud Holdings Limited (NASDAQ:KC) share price has fared very poorly over the last month, falling by a substantial 27%. Nonetheless, the last 30 days have barely left a scratch on the stock's annual performance, which is up a whopping 346%.

Even after such a large drop in price, given close to half the companies operating in the United States' IT industry have price-to-sales ratios (or "P/S") below 2.4x, you may still consider Kingsoft Cloud Holdings as a stock to potentially avoid with its 3.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

View our latest analysis for Kingsoft Cloud Holdings

How Has Kingsoft Cloud Holdings Performed Recently?

Recent times haven't been great for Kingsoft Cloud Holdings as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. 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 Kingsoft Cloud Holdings.

Do Revenue Forecasts Match The High P/S Ratio?

Kingsoft Cloud Holdings' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 20%. Still, revenue has fallen 7.8% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 19% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 22% per annum growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Kingsoft Cloud Holdings' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Kingsoft Cloud Holdings' P/S Mean For Investors?

Kingsoft Cloud Holdings' P/S remain high even after its stock plunged. 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.

We've concluded that Kingsoft Cloud Holdings currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Kingsoft Cloud Holdings that you should be aware 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.

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

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.