Investor Optimism Abounds Squarespace, Inc. (NYSE:SQSP) But Growth Is Lacking

Squarespace, Inc.'s (NYSE:SQSP) price-to-sales (or "P/S") ratio of 4x may look like a poor investment opportunity when you consider close to half the companies in the IT industry in the United States have P/S ratios below 1.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Squarespace

How Squarespace Has Been Performing

Squarespace's revenue growth of late has been pretty similar to most other companies. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. 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 Squarespace will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Squarespace?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 15% last year. This was backed up an excellent period prior to see revenue up by 56% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 14% per year over the next three years. That's shaping up to be similar to the 13% per annum growth forecast for the broader industry.

In light of this, it's curious that Squarespace's 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 Squarespace's 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.

Analysts are forecasting Squarespace's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Squarespace (1 doesn't sit too well with us) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.