Investor Optimism Abounds Tyler Technologies, Inc. (NYSE:TYL) But Growth Is Lacking

With a price-to-sales (or "P/S") ratio of 11.2x Tyler Technologies, Inc. (NYSE:TYL) may be sending very bearish signals at the moment, given that almost half of all the Software companies in the United States have P/S ratios under 4.8x and even P/S lower than 1.8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Our free stock report includes 1 warning sign investors should be aware of before investing in Tyler Technologies. Read for free now.

Check out our latest analysis for Tyler Technologies

What Does Tyler Technologies' P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Tyler Technologies has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. 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 Tyler Technologies.

Do Revenue Forecasts Match The High P/S Ratio?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 10.0% last year. Revenue has also lifted 25% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 9.4% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 16% per annum growth forecast for the broader industry.

In light of this, it's alarming that Tyler Technologies' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Tyler Technologies' P/S Mean For Investors?

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.

It comes as a surprise to see Tyler Technologies trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for Tyler Technologies that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.