There's Reason For Concern Over PowerSchool Holdings, Inc.'s (NYSE:PWSC) Price

You may think that with a price-to-sales (or "P/S") ratio of 5.8x PowerSchool Holdings, Inc. (NYSE:PWSC) is a stock to potentially avoid, seeing as almost half of all the Software companies in the United States have P/S ratios under 4.6x and even P/S lower than 1.8x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for PowerSchool Holdings

How Has PowerSchool Holdings Performed Recently?

PowerSchool Holdings could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

What Are Revenue Growth Metrics Telling Us About The High P/S?

There's an inherent assumption that a company should outperform the industry for P/S ratios like PowerSchool Holdings' to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 9.9%. This was backed up an excellent period prior to see revenue up by 56% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 13% each year as estimated by the twelve analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 17% per annum, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that PowerSchool Holdings' P/S is outpacing its industry peers. 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.

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

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've concluded that PowerSchool Holdings currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with PowerSchool Holdings.

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