Lumentum Holdings Inc. (NASDAQ:LITE) Stocks Shoot Up 50% But Its P/S Still Looks Reasonable

Lumentum Holdings Inc. (NASDAQ:LITE) shareholders are no doubt pleased to see that the share price has bounced 50% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 65%.

Following the firm bounce in price, given close to half the companies operating in the United States' Communications industry have price-to-sales ratios (or "P/S") below 1.7x, you may consider Lumentum Holdings as a stock to potentially avoid with its 3.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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Check out our latest analysis for Lumentum Holdings

How Lumentum Holdings Has Been Performing

With revenue growth that's inferior to most other companies of late, Lumentum Holdings has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Lumentum Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Lumentum Holdings' Revenue Growth Trending?

Lumentum Holdings' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.6% last year. Still, lamentably revenue has fallen 12% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 33% over the next year. With the industry only predicted to deliver 9.0%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Lumentum Holdings' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Lumentum Holdings' P/S Mean For Investors?

The large bounce in Lumentum Holdings' shares has lifted the company's P/S handsomely. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Lumentum Holdings 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 the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 2 warning signs for Lumentum Holdings you should be aware of, and 1 of them makes us a bit uncomfortable.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.