ACV Auctions Inc.'s (NASDAQ:ACVA) price-to-sales (or "P/S") ratio of 5.9x may look like a poor investment opportunity when you consider close to half the companies in the Commercial Services industry in the United States have P/S ratios below 1.4x. 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 ACV Auctions Has Been Performing
Recent times have been advantageous for ACV Auctions as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Keen to find out how analysts think ACV Auctions' future stacks up against the industry? In that case, our free report is a great place to start.
How Is ACV Auctions' Revenue Growth Trending?
There's an inherent assumption that a company should far outperform the industry for P/S ratios like ACV Auctions' to be considered reasonable.
If we review the last year of revenue growth, the company posted a terrific increase of 22%. Pleasingly, revenue has also lifted 89% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Turning to the outlook, the next three years should generate growth of 30% per year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 9.2% each year growth forecast for the broader industry.
With this in mind, it's not hard to understand why ACV Auctions' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On ACV Auctions' P/S
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.
Our look into ACV Auctions 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.
It is also worth noting that we have found 2 warning signs for ACV Auctions that you need to take into consideration.
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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