With a price-to-sales (or "P/S") ratio of 12.1x MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI) may be sending very bearish signals at the moment, given that almost half of all the Semiconductor companies in the United States have P/S ratios under 4x and even P/S lower than 1.6x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has MACOM Technology Solutions Holdings Performed Recently?

Recent times haven't been great for MACOM Technology Solutions Holdings as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on MACOM Technology Solutions Holdings will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For MACOM Technology Solutions Holdings?

The only time you'd be truly comfortable seeing a P/S as steep as MACOM Technology Solutions Holdings' is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Fortunately, a few good years before that means that it was still able to grow revenue by 13% in total over the last three years. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, revenue is anticipated to climb by 15% each year during the coming three years according to the analysts following the company. With the industry predicted to deliver 25% growth per annum, the company is positioned for a weaker revenue result.

With this information, we find it concerning that MACOM Technology Solutions Holdings is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It comes as a surprise to see MACOM Technology Solutions Holdings trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - MACOM Technology Solutions Holdings has 1 warning sign we think you should be aware of.

If you're unsure about the strength of MACOM Technology Solutions Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.