Samsara Inc. (NYSE:IOT) shares have had a really impressive month, gaining 45% after a shaky period beforehand. The annual gain comes to 153% following the latest surge, making investors sit up and take notice.
Since its price has surged higher, Samsara may be sending strong sell signals at present with a price-to-sales (or “P/S”) ratio of 21.8x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 4.3x and even P/S lower than 1.7x aren’t out of the ordinary. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
How Has Samsara Performed Recently?
With revenue growth that’s superior to most other companies of late, Samsara has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.
If you’d like to see what analysts are forecasting going forward, you should check out our free report on Samsara.
How Is Samsara’s Revenue Growth Trending?
Samsara’s P/S ratio would be typical for a company that’s expected to deliver very strong growth, and importantly, perform much better than the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 43%. The strong recent performance means it was also able to grow revenue by 239% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.
Turning to the outlook, the next three years should generate growth of 28% each year as estimated by the analysts watching the company. That’s shaping up to be materially higher than the 16% per year growth forecast for the broader industry.
With this information, we can see why Samsara 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 Bottom Line On Samsara’s P/S
Shares in Samsara have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.
We’ve established that Samsara maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.
Before you take the next step, you should know about the 4 warning signs for Samsara that we have uncovered.
If strong companies turning a profit tickle your fancy, then you’ll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
Valuation is complex, but we’re helping make it simple.
Find out whether Samsara is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.