Shopify Inc.'s (NYSE:SHOP) Earnings Haven't Escaped The Attention Of Investors

When you see that almost half of the companies in the IT industry in the United States have price-to-sales ratios (or "P/S") below 1.4x, Shopify Inc. (NYSE:SHOP) looks to be giving off strong sell signals with its 13.7x 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 Shopify

What Does Shopify's Recent Performance Look Like?

Shopify certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Shopify will help you uncover what's on the horizon.

How Is Shopify's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 22%. Pleasingly, revenue has also lifted 242% in aggregate from three years ago, thanks to the last 12 months of growth. 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 21% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 13% per year growth forecast for the broader industry.

With this information, we can see why Shopify is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Shopify's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. 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 strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.