TeraWulf Inc. (NASDAQ:WULF) shares have retraced a considerable 30% in the last month, reversing a fair amount of their solid recent performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 130%.

Even after such a large drop in price, TeraWulf may still be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 16.6x, since almost half of all companies in the Software industry in the United States have P/S ratios under 5.5x and even P/S lower than 2x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How TeraWulf Has Been Performing

TeraWulf certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is TeraWulf's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 131%. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 99% over the next year. With the industry only predicted to deliver 26%, the company is positioned for a stronger revenue result.

With this information, we can see why TeraWulf is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

A significant share price dive has done very little to deflate TeraWulf's very lofty P/S. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look into TeraWulf shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware TeraWulf is showing 3 warning signs in our investment analysis, and 2 of those are significant.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.