Why Investors Shouldn't Be Surprised By ActiveOps Plc's (LON:AOM) 30% Share Price Surge
ActiveOps Plc (LON:AOM) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 24% is also fairly reasonable.
Although its price has surged higher, it's still not a stretch to say that ActiveOps' price-to-sales (or "P/S") ratio of 3x right now seems quite "middle-of-the-road" compared to the Software industry in the United Kingdom, where the median P/S ratio is around 2.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
Check out our latest analysis for ActiveOps
How Has ActiveOps Performed Recently?
With revenue growth that's inferior to most other companies of late, ActiveOps has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. 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 ActiveOps will help you uncover what's on the horizon.
Do Revenue Forecasts Match The P/S Ratio?
The only time you'd be comfortable seeing a P/S like ActiveOps' is when the company's growth is tracking the industry closely.
If we review the last year of revenue growth, the company posted a worthy increase of 11%. The latest three year period has also seen a 25% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.
Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 7.9% per year over the next three years. With the industry predicted to deliver 9.8% growth per annum, the company is positioned for a comparable revenue result.
In light of this, it's understandable that ActiveOps' P/S sits in line with the majority of other companies. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.
What We Can Learn From ActiveOps' P/S?
ActiveOps appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
We've seen that ActiveOps 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 2 warning signs for ActiveOps that you need to be mindful of.
If you're unsure about the strength of ActiveOps' 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.
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