When close to half the companies in the Consumer Services industry in the United States have price-to-sales ratios (or "P/S") below 1.3x, you may consider Udemy, Inc. (NASDAQ:UDMY) as a stock to potentially avoid with its 3.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.
NasdaqGS:UDMY Price to Sales Ratio vs Industry February 13th 2024
What Does Udemy's P/S Mean For Shareholders?
Udemy's revenue growth of late has been pretty similar to most other companies. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. 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 Udemy's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Udemy's Revenue Growth Trending?
In order to justify its P/S ratio, Udemy would need to produce impressive growth in excess of the industry.
Retrospectively, the last year delivered an exceptional 18% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 64% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 8.7% per annum over the next three years. That's shaping up to be materially lower than the 15% per annum growth forecast for the broader industry.
With this in consideration, we believe it doesn't make sense that Udemy's P/S is outpacing its industry peers. 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 Bottom Line On Udemy's P/S
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 Udemy, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Plus, you should also learn about these 2 warning signs we've spotted with Udemy.
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).
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