Pure Storage, Inc.'s (NYSE:PSTG) P/S Is On The Mark

Pure Storage, Inc.'s (NYSE:PSTG) price-to-sales (or "P/S") ratio of 4x may look like a poor investment opportunity when you consider close to half the companies in the Tech industry in the United States have P/S ratios below 1.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Pure Storage

How Pure Storage Has Been Performing

With its revenue growth in positive territory compared to the declining revenue of most other companies, Pure Storage has been doing quite well of late. It seems that many are expecting the company to continue defying the broader industry adversity, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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?

In order to justify its P/S ratio, Pure Storage would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 7.6%. This was backed up an excellent period prior to see revenue up by 70% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 14% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 5.6% per annum, which is noticeably less attractive.

In light of this, it's understandable that Pure Storage's 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 We Can Learn From Pure Storage's P/S?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Pure Storage maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Tech industry, as expected. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Pure Storage that you should be aware of.

If you're unsure about the strength of Pure Storage's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.