Revenues Not Telling The Story For Fastly, Inc. (NYSE:FSLY) After Shares Rise 26%

Fastly, Inc. (NYSE:FSLY) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. But the last month did very little to improve the 60% share price decline over the last year.

Although its price has surged higher, there still wouldn't be many who think Fastly's price-to-sales (or "P/S") ratio of 2x is worth a mention when the median P/S in the United States' IT industry is similar at about 2.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Fastly

What Does Fastly's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Fastly has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

How Is Fastly's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Fastly's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 64% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 7.9% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 12% per annum, which is noticeably more attractive.

In light of this, it's curious that Fastly's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Fastly's P/S?

Fastly appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look at the analysts forecasts of Fastly's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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

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.