Investors Appear Satisfied With Pure Storage, Inc.'s (NYSE:PSTG) Prospects As Shares Rocket 30%

Pure Storage, Inc. (NYSE:PSTG) shares have continued their recent momentum with a 30% gain in the last month alone. The annual gain comes to 119% following the latest surge, making investors sit up and take notice.

After such a large jump in price, when almost half of the companies in the United States' Tech industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider Pure Storage as a stock not worth researching with its 5.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Pure Storage

What Does Pure Storage's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Pure Storage 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.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Pure Storage.

How Is Pure Storage's Revenue Growth Trending?

Pure Storage's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 2.8%. This was backed up an excellent period prior to see revenue up by 68% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 11% per year over the next three years. With the industry only predicted to deliver 5.9% each year, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Pure Storage's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Pure Storage's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our look into Pure Storage shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Pure Storage that you need to be mindful of.

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.