Some Confidence Is Lacking In Cogent Communications Holdings, Inc.'s (NASDAQ:CCOI) P/S

When close to half the companies in the Telecom industry in the United States have price-to-sales ratios (or "P/S") below 1.3x, you may consider Cogent Communications Holdings, Inc. (NASDAQ:CCOI) as a stock to avoid entirely with its 3.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Cogent Communications Holdings

How Cogent Communications Holdings Has Been Performing

Recent times have been pleasing for Cogent Communications Holdings as its revenue has risen in spite of the industry's average revenue going into reverse. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Cogent Communications Holdings' Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 49% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 77% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 6.9% per annum as estimated by the eleven analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 188% each year, which is noticeably more attractive.

In light of this, it's alarming that Cogent Communications Holdings' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Cogent Communications Holdings, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 6 warning signs for Cogent Communications Holdings (4 are a bit unpleasant) you should be aware 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.