Madison Square Garden Sports Corp.'s (NYSE:MSGS) price-to-sales (or "P/S") ratio of 4.8x may look like a poor investment opportunity when you consider close to half the companies in the Entertainment industry in the United States have P/S ratios below 1.3x.   Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.  

NYSE:MSGS Price to Sales Ratio vs Industry June 4th 2024

How Has Madison Square Garden Sports Performed Recently?

Madison Square Garden Sports hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average.   Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S..  However, if this isn't the case, investors might get caught out paying too much for the stock.    

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Madison Square Garden Sports.

Is There Enough Revenue Growth Forecasted For Madison Square Garden Sports?  

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

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago.   Although pleasingly revenue has lifted 254% in aggregate from three years ago, notwithstanding the last 12 months.  Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.  

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 2.8% per annum over the next three years.  That's shaping up to be materially lower than the 9.9% per year growth forecast for the broader industry.

In light of this, it's alarming that Madison Square Garden Sports' P/S sits above the majority of other companies.  It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen.  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

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.

We've concluded that Madison Square Garden Sports currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry.  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's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Madison Square Garden Sports (at least 2 which don't sit too well with us), and understanding them should be part of your investment process.  

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.