Revenues Not Telling The Story For Seagate Technology Holdings plc (NASDAQ:STX) After Shares Rise 39%

Those holding Seagate Technology Holdings plc (NASDAQ:STX) shares would be relieved that the share price has rebounded 39% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, despite the strong performance over the last month, the full year gain of 6.4% isn't as attractive.

Since its price has surged higher, you could be forgiven for thinking Seagate Technology Holdings is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.3x, considering almost half the companies in the United States' Tech industry have P/S ratios below 0.9x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Seagate Technology Holdings

How Seagate Technology Holdings Has Been Performing

Recent times have been advantageous for Seagate Technology Holdings as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Is There Enough Revenue Growth Forecasted For Seagate Technology Holdings?

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

Retrospectively, the last year delivered an exceptional 36% gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 29% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 7.8% per year during the coming three years according to the analysts following the company. That's shaping up to be similar to the 6.3% each year growth forecast for the broader industry.

With this in consideration, we find it intriguing that Seagate Technology Holdings' P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

The large bounce in Seagate Technology Holdings' shares has lifted the company's P/S handsomely. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Given Seagate Technology Holdings' future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 4 warning signs for Seagate Technology Holdings (3 make us uncomfortable!) that we have uncovered.

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.