Revenues Tell The Story For Shopify Inc. (NYSE:SHOP)

When close to half the companies in the IT industry in the United States have price-to-sales ratios (or "P/S") below 2x, you may consider Shopify Inc. (NYSE:SHOP) as a stock to avoid entirely with its 11.2x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Shopify

What Does Shopify's Recent Performance Look Like?

Recent times have been advantageous for Shopify as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

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

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

If we review the last year of revenue growth, the company posted a terrific increase of 26%. Pleasingly, revenue has also lifted 115% in aggregate from three years ago, thanks to the last 12 months of growth. 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 21% per annum as estimated by the analysts watching the company. With the industry only predicted to deliver 11% per year, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Shopify's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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.

As we suspected, our examination of Shopify'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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Shopify with six simple checks will allow you to discover any risks that could be an issue.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com