Revenues Tell The Story For New Relic, Inc. (NYSE:NEWR)
With a price-to-sales (or "P/S") ratio of 5.5x New Relic, Inc. (NYSE:NEWR) may be sending bearish signals at the moment, given that almost half of all Software companies in the United States have P/S ratios under 4.2x and even P/S lower than 1.8x are not unusual. 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 New Relic
What Does New Relic's Recent Performance Look Like?
With revenue growth that's superior to most other companies of late, New Relic has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.
Want the full picture on analyst estimates for the company? Then our free report on New Relic will help you uncover what's on the horizon.
What Are Revenue Growth Metrics Telling Us About The High P/S?
New Relic's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 18%. The latest three year period has also seen an excellent 55% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Turning to the outlook, the next three years should generate growth of 16% each year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 13% per annum growth forecast for the broader industry.
With this in mind, it's not hard to understand why New Relic's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
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.
Our look into New Relic shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Plus, you should also learn about these 2 warning signs we've spotted with New Relic.
If you're unsure about the strength of New Relic'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.
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