Investors Appear Satisfied With The9 Limited's (NASDAQ:NCTY) Prospects As Shares Rocket 32%
The9 Limited (NASDAQ:NCTY) shares have had a really impressive month, gaining 32% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 29% over that time.
Since its price has surged higher, given close to half the companies operating in the United States' Entertainment industry have price-to-sales ratios (or "P/S") below 1.3x, you may consider The9 as a stock to potentially avoid with its 1.9x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for The9
What Does The9's Recent Performance Look Like?
For example, consider that The9's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on The9 will help you shine a light on its historical performance.
What Are Revenue Growth Metrics Telling Us About The High P/S?
In order to justify its P/S ratio, The9 would need to produce impressive growth in excess of the industry.
Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. In spite of this, the company still managed to deliver immense revenue growth over the last three years. Accordingly, shareholders will be pleased, but also have some serious questions to ponder about the last 12 months.
When compared to the industry's one-year growth forecast of 11%, the most recent medium-term revenue trajectory is noticeably more alluring
In light of this, it's understandable that The9's P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.
The Key Takeaway
The large bounce in The9's shares has lifted the company's P/S handsomely. 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.
It's no surprise that The9 can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.
Before you settle on your opinion, we've discovered 5 warning signs for The9 (2 are significant!) that you should be aware of.
If you're unsure about the strength of The9's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
