Blend Labs, Inc. (NYSE:BLND) shares have continued their recent momentum with a 25% gain in the last month alone. The last month tops off a massive increase of 261% in the last year.

After such a large jump in price, Blend Labs may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 7.3x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 5x and even P/S lower than 1.8x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Has Blend Labs Performed Recently?

Blend Labs could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Blend Labs' Revenue Growth Trending?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.2%. The last three years don't look nice either as the company has shrunk revenue by 15% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 20% over the next year. Meanwhile, the rest of the industry is forecast to expand by 25%, which is noticeably more attractive.

With this information, we find it concerning that Blend Labs is trading at a P/S higher than the industry. 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.

What We Can Learn From Blend Labs' P/S?

The large bounce in Blend Labs' shares has lifted the company's P/S handsomely. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Blend Labs, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

You should always think about risks. Case in point, we've spotted 2 warning signs for Blend Labs you should be aware of.

If you're unsure about the strength of Blend Labs' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.