X3 Holdings Co Ltd.'s (NASDAQ:XTKG) Price Is Out Of Tune With Revenues

You may think that with a price-to-sales (or "P/S") ratio of 10.9x X3 Holdings Co Ltd. (NASDAQ:XTKG) is a stock to avoid completely, seeing as almost half of all the Software companies in the United States have P/S ratios under 4.3x and even P/S lower than 1.6x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for X3 Holdings Co

How Has X3 Holdings Co Performed Recently?

Recent times have been quite advantageous for X3 Holdings Co as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for X3 Holdings Co, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is X3 Holdings Co's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as X3 Holdings Co's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 60% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 37% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 15% shows it's an unpleasant look.

With this in mind, we find it worrying that X3 Holdings Co's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On X3 Holdings Co's P/S

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 X3 Holdings Co currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about these 3 warning signs we've spotted with X3 Holdings Co.

If these risks are making you reconsider your opinion on X3 Holdings Co, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.