When close to half the companies in the IT industry in the United States have price-to-sales ratios (or "P/S") below 1.9x, you may consider MongoDB, Inc. (NASDAQ:MDB) as a stock to avoid entirely with its 10.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.
How MongoDB Has Been Performing
MongoDB 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.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on MongoDB.How Is MongoDB's Revenue Growth Trending?
In order to justify its P/S ratio, MongoDB would need to produce outstanding growth that's well in excess of the industry.
Retrospectively, the last year delivered an exceptional 29% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 175% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Turning to the outlook, the next three years should generate growth of 18% each year as estimated by the analysts watching the company. With the industry only predicted to deliver 11% each year, the company is positioned for a stronger revenue result.
In light of this, it's understandable that MongoDB's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our look into MongoDB 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 MongoDB is showing 3 warning signs in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on MongoDB, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com