MeridianLink, Inc. (NYSE:MLNK) Stock Rockets 27% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, MeridianLink, Inc. (NYSE:MLNK) shares have been powering on, with a gain of 27% in the last thirty days. The last 30 days bring the annual gain to a very sharp 67%.

Since its price has surged higher, MeridianLink may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 6.2x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 4.5x 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.

See our latest analysis for MeridianLink

How MeridianLink Has Been Performing

Recent times haven't been great for MeridianLink as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For MeridianLink?

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

Retrospectively, the last year delivered a decent 6.4% gain to the company's revenues. Pleasingly, revenue has also lifted 50% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 7.7% as estimated by the eight analysts watching the company. With the industry predicted to deliver 15% growth, the company is positioned for a weaker revenue result.

In light of this, it's alarming that MeridianLink's P/S sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On MeridianLink's P/S

MeridianLink shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It comes as a surprise to see MeridianLink trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for MeridianLink with six simple checks will allow you to discover any risks that could be an issue.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.