What Instructure Holdings, Inc.'s (NYSE:INST) P/S Is Not Telling You

You may think that with a price-to-sales (or "P/S") ratio of 5.9x Instructure Holdings, Inc. (NYSE:INST) is a stock to potentially avoid, seeing as almost half of all the Software companies in the United States have P/S ratios under 4.4x and even P/S lower than 1.8x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Instructure Holdings

How Instructure Holdings Has Been Performing

Recent times haven't been great for Instructure Holdings as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. 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 Instructure Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Instructure Holdings' Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 12% last year. This was backed up an excellent period prior to see revenue up by 76% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the twelve analysts watching the company. With the industry predicted to deliver 15% growth each year, the company is positioned for a comparable revenue result.

In light of this, it's curious that Instructure Holdings' P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Instructure Holdings' P/S Mean For Investors?

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.

Given Instructure Holdings' future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Instructure Holdings you should know about.

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.