Despite an already strong run, Applied Optoelectronics, Inc. (NASDAQ:AAOI) shares have been powering on, with a gain of 26% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 27% in the last year.

Following the firm bounce in price, when almost half of the companies in the United States' Communications industry have price-to-sales ratios (or "P/S") below 1.1x, you may consider Applied Optoelectronics as a stock probably not worth researching with its 2.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Has Applied Optoelectronics Performed Recently?

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. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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%. The last three years don't look nice either as the company has shrunk revenue by 11% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 65% as estimated by the four analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 8.1%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Applied Optoelectronics' P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Applied Optoelectronics' P/S?

Applied Optoelectronics shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Our look into Applied Optoelectronics shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Applied Optoelectronics (1 can't be ignored!) that you should be aware of before investing here.

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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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.