With Smartsheet Inc. (NYSE:SMAR) It Looks Like You'll Get What You Pay For
With a price-to-sales (or "P/S") ratio of 8.1x Smartsheet Inc. (NYSE:SMAR) may be sending very bearish signals at the moment, given that almost half of all the Software companies in the United States have P/S ratios under 4.1x and even P/S lower than 1.9x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for Smartsheet
How Has Smartsheet Performed Recently?
Smartsheet certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.
Keen to find out how analysts think Smartsheet's future stacks up against the industry? In that case, our free report is a great place to start.
Do Revenue Forecasts Match The High P/S Ratio?
In order to justify its P/S ratio, Smartsheet would need to produce outstanding growth that's well in excess of the industry.
Retrospectively, the last year delivered an exceptional 39% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 183% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Looking ahead now, revenue is anticipated to climb by 22% per annum during the coming three years according to the analysts following the company. With the industry only predicted to deliver 13% per annum, the company is positioned for a stronger revenue result.
With this in mind, it's not hard to understand why Smartsheet'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
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.
Our look into Smartsheet shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 3 warning signs for Smartsheet you should be aware of.
If these risks are making you reconsider your opinion on Smartsheet, explore our interactive list of high quality stocks to get an idea of what else is out there.
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.
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