Clearway Energy, Inc.'s (NYSE:CWEN.A) Business Is Yet to Catch Up With Its Share Price

With a median price-to-sales (or "P/S") ratio of close to 2.2x in the Renewable Energy industry in the United States, you could be forgiven for feeling indifferent about Clearway Energy, Inc.'s (NYSE:CWEN.A) P/S ratio, which comes in at about the same. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Clearway Energy

How Has Clearway Energy Performed Recently?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Clearway Energy has been doing quite well of late. One possibility is that the P/S ratio is moderate because investors think the company's revenue will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Clearway Energy would need to produce growth that's similar to the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Regardless, revenue has managed to lift by a handy 9.4% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 5.9% each year over the next three years. That's shaping up to be materially lower than the 9.2% each year growth forecast for the broader industry.

With this information, we find it interesting that Clearway Energy is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

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 that Clearway Energy's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Before you take the next step, you should know about the 4 warning signs for Clearway Energy (1 shouldn't be ignored!) that we have uncovered.

If you're unsure about the strength of Clearway Energy'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com