What Pexip Holding ASA's (OB:PEXIP) 27% Share Price Gain Is Not Telling You

Pexip Holding ASA (OB:PEXIP) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 65% in the last year.

After such a large jump in price, Pexip Holding may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 6.3x, when you consider almost half of the companies in the Software industry in Norway have P/S ratios under 4.7x and even P/S lower than 1.1x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Pexip Holding

How Pexip Holding Has Been Performing

With revenue growth that's superior to most other companies of late, Pexip Holding has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Revenue Growth Forecasted For Pexip Holding?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Pexip Holding's to be considered reasonable.

Retrospectively, the last year delivered a decent 15% gain to the company's revenues. The latest three year period has also seen an excellent 41% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next year should generate growth of 11% as estimated by the three analysts watching the company. With the industry predicted to deliver 9.6% growth , the company is positioned for a comparable revenue result.

In light of this, it's curious that Pexip Holding's P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

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

Pexip Holding shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Analysts are forecasting Pexip Holding's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Pexip Holding that you should be aware of.

If these risks are making you reconsider your opinion on Pexip Holding, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.