Clearwater Analytics Holdings, Inc.'s (NYSE:CWAN) Share Price Matching Investor Opinion

Clearwater Analytics Holdings, Inc.'s (NYSE:CWAN) price-to-sales (or "P/S") ratio of 10x might make it look like a strong sell right now compared to the Software industry in the United States, where around half of the companies have P/S ratios below 4.5x and even P/S below 1.7x are quite common. 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 Clearwater Analytics Holdings

What Does Clearwater Analytics Holdings' P/S Mean For Shareholders?

Recent times have been advantageous for Clearwater Analytics Holdings as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Clearwater Analytics Holdings?

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

Taking a look back first, we see that the company grew revenue by an impressive 21% last year. Pleasingly, revenue has also lifted 81% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 18% per year during the coming three years according to the eleven analysts following the company. With the industry only predicted to deliver 15% per year, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Clearwater Analytics Holdings' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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 Clearwater Analytics Holdings 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. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Clearwater Analytics Holdings that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.