Semrush Holdings, Inc.'s (NYSE:SEMR) Share Price Could Signal Some Risk

You may think that with a price-to-sales (or "P/S") ratio of 5.8x Semrush Holdings, Inc. (NYSE:SEMR) is a stock to potentially avoid, seeing as almost half of all the Software companies in the United States have P/S ratios under 4.3x and even P/S lower than 1.6x 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 Semrush Holdings

What Does Semrush Holdings' P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Semrush Holdings has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Semrush Holdings.

Do Revenue Forecasts Match The High P/S Ratio?

Semrush Holdings' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered an exceptional 20% gain to the company's top line. The latest three year period has also seen an excellent 135% 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.

Looking ahead now, revenue is anticipated to climb by 18% each year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 18% per annum, which is not materially different.

In light of this, it's curious that Semrush Holdings' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Bottom Line On Semrush Holdings' P/S

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Semrush Holdings currently trades on a higher than expected P/S. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. 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.

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

If you're unsure about the strength of Semrush Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

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