Broadcom Inc. (NASDAQ:AVGO) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The annual gain comes to 109% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Broadcom may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 17.6x, since almost half of all companies in the Semiconductor industry in the United States have P/S ratios under 4.5x and even P/S lower than 1.7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Broadcom's P/S Mean For Shareholders?

Recent times haven't been great for Broadcom as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Broadcom's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Broadcom's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 32% last year. Pleasingly, revenue has also lifted 77% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 16% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 25% per annum, which is noticeably more attractive.

In light of this, it's alarming that Broadcom's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Broadcom's P/S?

The strong share price surge has lead to Broadcom's P/S soaring as well. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Broadcom, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 4 warning signs for Broadcom 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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