What You Can Learn From Shopify Inc.'s (NYSE:SHOP) P/S

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 1.7x, Shopify Inc. (NYSE:SHOP) looks to be giving off strong sell signals with its 15.1x 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.

See 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. 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.

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.

Is There Enough Revenue Growth Forecasted For Shopify?

The only time you'd be truly comfortable seeing a P/S as steep as Shopify's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line. Pleasingly, revenue has also lifted 171% 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.

Looking ahead now, revenue is anticipated to climb by 20% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 14% per year, which is noticeably less attractive.

In light of this, it's understandable that Shopify's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Shopify's P/S Mean For Investors?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Shopify's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Shopify is showing 1 warning sign in our investment analysis, you should know about.

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

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

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.