SPS Commerce, Inc.'s (NASDAQ:SPSC) Price Is Out Of Tune With Revenues

With a price-to-sales (or "P/S") ratio of 11.5x SPS Commerce, Inc. (NASDAQ:SPSC) may be sending very bearish signals at the moment, given that almost half of all the Software companies in the United States have P/S ratios under 5.6x and even P/S lower than 2x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for SPS Commerce

What Does SPS Commerce's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, SPS Commerce has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think SPS Commerce's future stacks up against the industry? In that case, our free report is a great place to start.

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

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

Taking a look back first, we see that the company grew revenue by an impressive 19% last year. The latest three year period has also seen an excellent 67% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 17% per year during the coming three years according to the eleven analysts following the company. With the industry predicted to deliver 21% growth each year, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that SPS Commerce's 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.

The Key Takeaway

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 concluded that SPS Commerce currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for SPS Commerce with six simple checks.

If you're unsure about the strength of SPS Commerce'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.