DocuSign, Inc. (NASDAQ:DOCU) shares have continued their recent momentum with a 29% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 90%.

After such a large jump in price, DocuSign may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 7.1x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 5.8x and even P/S lower than 2x 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.

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

With revenue growth that's inferior to most other companies of late, DocuSign has been relatively sluggish. 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.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered a decent 7.5% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 49% in total over the last three years. 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 three years should generate growth of 6.5% each year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 21% per year, which is noticeably more attractive.

In light of this, it's alarming that DocuSign'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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

The large bounce in DocuSign's shares has lifted the company's P/S handsomely. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It comes as a surprise to see DocuSign trade at such a high P/S given the revenue forecasts look less than stellar. 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. At these price levels, investors should remain cautious, particularly if things don't improve.

Having said that, be aware DocuSign is showing 2 warning signs in our investment analysis, you should know about.

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

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