Despite an already strong run, Arteris, Inc. (NASDAQ:AIP) shares have been powering on, with a gain of 36% in the last thirty days. The annual gain comes to 114% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Arteris may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 8.7x, since almost half of all companies in the Software industry in the United States have P/S ratios under 5.4x 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 Arteris Has Been Performing

Arteris could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Arteris?

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

Retrospectively, the last year delivered a decent 4.5% gain to the company's revenues. Pleasingly, revenue has also lifted 34% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 17% per annum during the coming three years according to the five analysts following the company. With the industry predicted to deliver 21% growth each year, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Arteris' P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Arteris' P/S?

Arteris' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

It comes as a surprise to see Arteris trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Arteris is showing 3 warning signs in our investment analysis, you should know about.

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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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.