Samsara Inc. (NYSE:IOT) shares have had a very impressive month this month, up 27% after a volatile period, and looking back further, it’s encouraging to see that the stock is up 41% over the past year.
After a sharp rise in its share price, Samsara may be sending a strong sell signal at present with a price-to-sales (P/S) ratio of 20.2x. This is reasonable given that nearly half of the companies in the U.S. software industry have P/S ratios below 4.6x, and P/S ratios below 1.7x are not uncommon. However, there may be a reason why the P/S is so high, and further investigation is needed to determine if it is justified.
Check out our latest analysis for Samsara
NYSE:IOT Industry Sales Price Ratio July 23, 2024
Samsara performance
Samsara has been doing relatively well recently, with earnings growth outperforming most other companies. The market seems to expect this to continue, hence the high P/S ratio. If this were not the case, existing shareholders might be a bit worried about the viability of the share price.
If you want to find out what analysts are predicting going forward, check out this free report on Samsara.
Do earnings forecasts align with a high P/S ratio?
Samsara’s P/S ratio is typical for a company that is expected to experience very strong growth and, more importantly, perform much better than its industry.
Looking back, the company saw an exceptional 41% growth in sales last year, and the last three years saw incredible growth in overall revenue, buoyed by incredible growth in short-term performance. Therefore, let’s start by noting that the company has achieved significant revenue growth over this period.
Looking ahead, analysts who track the company expect its revenue to grow 26% annually over the next three years, compared to just 14% growth for the rest of the industry, which is decidedly less appealing.
With this information, we can see why Samsara is trading at such a high P/S relative to the industry – most investors are expecting this strong future growth and are likely willing to pay more for this stock.
The last word
Samsara’s P/S has grown strongly in the last month thanks to the rising share price, and while it’s argued that in certain industries the price-to-sales multiple is a poor measure of value, it can be a strong business sentiment indicator.
Samsara research shows that the company’s P/S ratio will remain high due to strong future earnings. Currently, shareholders are comfortable with the P/S as they are confident that future earnings will not be threatened. As long as these conditions remain unchanged, the stock price will continue to be strongly supported.
Before you take the next step, you should be aware of the three warning signs of reincarnation that we have spotted.
Of course, profitable companies with proven track records of strong earnings growth are generally safe investments, so we think you might find it useful to take a look at this free collection of other companies with reasonable P/E ratios and strong earnings growth.
Valuation is complicated, but we can help make it simple.
Find out if Samsara is overvalued or undervalued by checking our comprehensive analysis, including fair value estimates, risks and warnings, dividends, insider transactions, financials and more.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
Valuation is complicated, but we can help make it simple.
Find out if Samsara is overvalued or undervalued by checking our comprehensive analysis, including fair value estimates, risks and warnings, dividends, insider transactions, financials and more.
View your free analysis
Have something to say about this article? If you have any questions about the content, please contact us directly or email us at editorial-team@simplywallst.com.