There wouldn't be many who think Amplitude, Inc.'s (NASDAQ:AMPL) price-to-sales (or "P/S") ratio of 4.5x is worth a mention when the median P/S for the Software industry in the United States is similar at about 5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

What Does Amplitude's P/S Mean For Shareholders?

Amplitude 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 lift, which has kept the P/S from declining. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is Amplitude's Revenue Growth Trending?

In order to justify its P/S ratio, Amplitude would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. Pleasingly, revenue has also lifted 124% 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.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue should grow by 9.4% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 20% per year, which is noticeably more attractive.

With this information, we find it interesting that Amplitude is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Amplitude's 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.

When you consider that Amplitude's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Before you settle on your opinion, we've discovered 2 warning signs for Amplitude that you should be aware of.

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.