Despite an already strong run, Similarweb Ltd. (NYSE:SMWB) shares have been powering on, with a gain of 35% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 69% in the last year.
Although its price has surged higher, you could still be forgiven for feeling indifferent about Similarweb's P/S ratio of 3.4x, since the median price-to-sales (or "P/S") ratio for the Software industry in the United States is also close to 4.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
NYSE:SMWB Price to Sales Ratio vs Industry March 10th 2024
How Similarweb Has Been Performing
Similarweb could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
Keen to find out how analysts think Similarweb's future stacks up against the industry? In that case, our free report is a great place to start.
What Are Revenue Growth Metrics Telling Us About The P/S?
Similarweb's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.
If we review the last year of revenue growth, the company posted a worthy increase of 13%. Pleasingly, revenue has also lifted 133% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 14% each year over the next three years. That's shaping up to be similar to the 15% per annum growth forecast for the broader industry.
With this information, we can see why Similarweb is trading at a fairly similar P/S to the industry. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.
What Does Similarweb's P/S Mean For Investors?
Similarweb appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.
We've seen that Similarweb maintains an adequate P/S seeing as its revenue growth figures match the rest of the industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Similarweb that you need to be mindful of.
If these risks are making you reconsider your opinion on Similarweb, explore our interactive list of high quality stocks to get an idea of what else is out there.
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