Despite an already strong run, DigitalOcean Holdings, Inc. (NYSE:DOCN) shares have been powering on, with a gain of 28% in the last thirty days.    Looking back a bit further, it's encouraging to see the stock is up 49% in the last year.  

Since its price has surged higher, when almost half of the companies in the United States' IT industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider DigitalOcean Holdings as a stock not worth researching with its 4.7x P/S ratio.   Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.  

Check out our latest analysis for DigitalOcean Holdings

NYSE:DOCN Price to Sales Ratio vs Industry December 24th 2023

How Has DigitalOcean Holdings Performed Recently?

With revenue growth that's superior to most other companies of late, DigitalOcean Holdings has been doing relatively well.   It seems the market expects this form will continue into the future, hence the elevated P/S ratio.  However, if this isn't the case, investors might get caught out paying too much for the stock.    

Keen to find out how analysts think DigitalOcean Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

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

In order to justify its P/S ratio, DigitalOcean Holdings would need to produce outstanding growth that's well in excess of the industry.  

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line.   The latest three year period has also seen an excellent 112% overall rise in revenue, aided by its short-term performance.  Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.  

Shifting to the future, estimates from the twelve analysts covering the company suggest revenue should grow by 14% each year over the next three years.  With the industry predicted to deliver 14% growth  per annum, the company is positioned for a comparable revenue result.

With this information, we find it interesting that DigitalOcean Holdings is trading at a high P/S compared to the industry.  It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock.  These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.  

The Bottom Line On DigitalOcean Holdings' P/S

DigitalOcean Holdings' P/S has grown nicely over the last month thanks to a handy boost in the share price.      Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Analysts are forecasting DigitalOcean Holdings' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected.  When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term.  This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.    

We don't want to rain on the parade too much, but we did also find 2 warning signs for DigitalOcean Holdings (1 is potentially serious!) that you need to be mindful of.  

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).