Applied Optoelectronics, Inc. (NASDAQ:AAOI) Stocks Shoot Up 32% But Its P/S Still Looks Reasonable

Applied Optoelectronics, Inc. (NASDAQ:AAOI) shares have continued their recent momentum with a 32% gain in the last month alone. The annual gain comes to 118% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, you could be forgiven for thinking Applied Optoelectronics is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5x, considering almost half the companies in the United States' Communications industry have P/S ratios below 2.1x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Applied Optoelectronics

How Applied Optoelectronics Has Been Performing

With revenue growth that's superior to most other companies of late, Applied Optoelectronics has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 78% gain to the company's top line. The latest three year period has also seen an excellent 74% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 62% during the coming year according to the six analysts following the company. That's shaping up to be materially higher than the 13% growth forecast for the broader industry.

With this in mind, it's not hard to understand why Applied Optoelectronics' 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.

What We Can Learn From Applied Optoelectronics' P/S?

Shares in Applied Optoelectronics have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Applied Optoelectronics maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Communications industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Applied Optoelectronics (1 shouldn't be ignored!) that you should be aware of.

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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.