Applied Optoelectronics, Inc. (NASDAQ:AAOI) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 34% share price drop.
Although its price has dipped substantially, you could still be forgiven for thinking Applied Optoelectronics is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.7x, considering almost half the companies in the United States' Communications industry have P/S ratios below 1.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.
NasdaqGM:AAOI Price to Sales Ratio vs Industry August 16th 2024
How Applied Optoelectronics Has Been Performing
Applied Optoelectronics 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.. If not, then existing shareholders may be extremely nervous about the viability of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Applied Optoelectronics will help you uncover what's on the horizon.
Do Revenue Forecasts Match The High P/S Ratio?
In order to justify its P/S ratio, Applied Optoelectronics would need to produce impressive growth in excess of the industry.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 2.8%. This means it has also seen a slide in revenue over the longer-term as revenue is down 11% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 62% over the next year. With the industry only predicted to deliver 7.7%, the company is positioned for a stronger revenue result.
In light of this, it's understandable that Applied Optoelectronics' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Applied Optoelectronics' P/S?
Despite the recent share price weakness, Applied Optoelectronics' P/S remains higher than most other companies in the industry. 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.
As we suspected, our examination of Applied Optoelectronics' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you settle on your opinion, we've discovered 4 warning signs for Applied Optoelectronics that you should be aware of.
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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