SailPoint (SAIL): Evaluating Valuation After Recent Share Price Gains

SailPoint (SAIL) shares have climbed almost 7% in the past week, catching the attention of investors interested in software solutions for identity management. The stock’s recent strength adds to a strong month, with gains approaching 11%.

See our latest analysis for SailPoint.

The recent momentum in SailPoint’s share price, with a 7% jump for the week and an 11% increase over the last month, speaks to growing optimism about the company’s growth story rather than just a short-lived bounce. Despite some ups and downs this year, the stock’s 30-day share price return of 11.3% suggests that investor sentiment is starting to build, perhaps reflecting renewed confidence in SailPoint’s future prospects.

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But with shares now trading roughly 14% below the average analyst price target, is there actually room for further upside? Or has the market already factored in all of SailPoint’s growth potential?

Price-to-Sales Ratio of 13.4x: Is it justified?

SailPoint is currently trading at a price-to-sales (P/S) ratio of 13.4x, which is notably higher than both the industry and the market averages. Compared to its most recent closing price of $23.36, this premium valuation suggests investors are betting heavily on future growth despite ongoing losses.

The price-to-sales ratio compares a company’s market value to its annual revenue, providing a quick gauge of how much investors are willing to pay for every dollar of sales. In rapidly growing software companies, the P/S can offer insight when profits are negative or volatile, but a high figure also signals high expectations.

At 13.4x, SailPoint’s P/S is significantly above the broader US Software industry average, which stands at just 5.3x. Even when measured against the estimated fair P/S ratio of 8.4x, SailPoint’s current multiple appears demanding. This premium indicates that the market expects SailPoint’s revenue growth to surpass the average. However, this leaves little room for error if those expectations are not met.

Explore the SWS fair ratio for SailPoint

Result: Price-to-Sales of 13.4x (OVERVALUED)

However, sustained losses and high investor expectations mean that any revenue setback or failure to meet growth targets could quickly reverse SailPoint’s recent momentum.

Find out about the key risks to this SailPoint narrative.

Another View: Discounted Cash Flow Tells a Different Story

The SWS DCF model, which estimates a company’s intrinsic value by projecting future cash flows, arrives at a far more conservative result for SailPoint. According to this approach, SailPoint’s shares are actually trading well above their estimated fair value. This suggests the stock may be overvalued from this perspective. So, could the market be a little too optimistic, or is the growth outlook worth the premium?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out SailPoint for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

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A great starting point for your SailPoint research is our analysis highlighting 1 key reward and 1 important warning sign that could impact your investment decision.

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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.

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