Cloudflare, Inc.'s (NYSE:NET) P/S Is Still On The Mark Following 27% Share Price Bounce

Despite an already strong run, Cloudflare, Inc. (NYSE:NET) 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 69%.

Following the firm bounce in price, when almost half of the companies in the United States' IT industry have price-to-sales ratios (or "P/S") below 2.9x, you may consider Cloudflare as a stock not worth researching with its 30.6x P/S ratio. 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 Cloudflare

How Has Cloudflare Performed Recently?

Cloudflare certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Cloudflare would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 30% gain to the company's top line. The latest three year period has also seen an excellent 167% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 27% per year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 12% each year, which is noticeably less attractive.

With this information, we can see why Cloudflare is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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

Shares in Cloudflare have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

As we suspected, our examination of Cloudflare's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

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

If these risks are making you reconsider your opinion on Cloudflare, 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.