Unfortunately for some shareholders, the Applied Optoelectronics, Inc. (NASDAQ:AAOI) share price has dived 25% in the last thirty days, prolonging recent pain. Nonetheless, the last 30 days have barely left a scratch on the stock's annual performance, which is up a whopping 427%.

In spite of the heavy fall in price, given close to half the companies operating in the United States' Communications industry have price-to-sales ratios (or "P/S") below 1.1x, you may still consider Applied Optoelectronics as a stock to potentially avoid with its 1.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does Applied Optoelectronics' P/S Mean For Shareholders?

Applied Optoelectronics hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Applied Optoelectronics' Revenue Growth Trending?

Applied Optoelectronics' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 2.3%. As a result, revenue from three years ago have also fallen 7.2% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 32% during the coming year according to the four analysts following the company. With the industry only predicted to deliver 1.5%, the company is positioned for a stronger revenue result.

With this information, we can see why Applied Optoelectronics is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Applied Optoelectronics' P/S?

Despite the recent share price weakness, Applied Optoelectronics' P/S remains higher than most other companies in the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Applied Optoelectronics maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Communications industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 2 warning signs for Applied Optoelectronics that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.