Subdued Growth No Barrier To ADTRAN Holdings, Inc. (NASDAQ:ADTN) With Shares Advancing 25%

Despite an already strong run, ADTRAN Holdings, Inc. (NASDAQ:ADTN) shares have been powering on, with a gain of 25% in the last thirty days. The last 30 days bring the annual gain to a very sharp 45%.

In spite of the firm bounce in price, there still wouldn't be many who think ADTRAN Holdings' price-to-sales (or "P/S") ratio of 0.9x is worth a mention when the median P/S in the United States' Communications industry is similar at about 1.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for ADTRAN Holdings

How ADTRAN Holdings Has Been Performing

While the industry has experienced revenue growth lately, ADTRAN Holdings' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Some Revenue Growth Forecasted For ADTRAN Holdings?

ADTRAN Holdings' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a frustrating 29% decrease to the company's top line. Even so, admirably revenue has lifted 68% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 8.4% each year as estimated by the seven analysts watching the company. With the industry predicted to deliver 12% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's curious that ADTRAN Holdings' P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now ADTRAN Holdings' P/S is back within range of the industry median. 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.

When you consider that ADTRAN Holdings' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. 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 1 warning sign for ADTRAN Holdings that you should be aware of.

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.