Even With A 40% Surge, Cautious Investors Are Not Rewarding Grocery Outlet Holding Corp.'s (NASDAQ:GO) Performance Completely

Explore Grocery Outlet Holding's Fair Values from the Community and select yours

Grocery Outlet Holding Corp. (NASDAQ:GO) shareholders would be excited to see that the share price has had a great month, posting a 40% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.3% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that Grocery Outlet Holding's price-to-sales (or "P/S") ratio of 0.4x right now seems quite "middle-of-the-road" compared to the Consumer Retailing industry in the United States, where the median P/S ratio is around 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Grocery Outlet Holding

What Does Grocery Outlet Holding's Recent Performance Look Like?

Recent times have been advantageous for Grocery Outlet Holding as its revenues have been rising faster than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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How Is Grocery Outlet Holding's Revenue Growth Trending?

Grocery Outlet Holding's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a decent 8.5% gain to the company's revenues. Pleasingly, revenue has also lifted 38% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 8.3% per annum as estimated by the analysts watching the company. That's shaping up to be materially higher than the 5.2% per year growth forecast for the broader industry.

With this in consideration, we find it intriguing that Grocery Outlet Holding's P/S is closely matching its industry peers. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What We Can Learn From Grocery Outlet Holding's P/S?

Grocery Outlet Holding appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Grocery Outlet Holding currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

It is also worth noting that we have found 3 warning signs for Grocery Outlet Holding that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.