Despite an already strong run, Metalpha Technology Holding Limited (NASDAQ:MATH) shares have been powering on, with a gain of 26% in the last thirty days. The annual gain comes to 118% following the latest surge, making investors sit up and take notice.
Since its price has surged higher, you could be forgiven for thinking Metalpha Technology Holding is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.7x, considering almost half the companies in the United States' Consumer Finance industry have P/S ratios below 1.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
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What Does Metalpha Technology Holding's Recent Performance Look Like?
Recent times have been quite advantageous for Metalpha Technology Holding as its revenue has been rising very briskly. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.
Do Revenue Forecasts Match The High P/S Ratio?
The only time you'd be truly comfortable seeing a P/S as steep as Metalpha Technology Holding's is when the company's growth is on track to outshine the industry decidedly.
If we review the last year of revenue growth, the company posted a terrific increase of 204%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.
Comparing that to the industry, which is only predicted to deliver 40% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.
With this in consideration, it's not hard to understand why Metalpha Technology Holding's P/S is high relative to its industry peers. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.
The Final Word
Metalpha Technology Holding's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.
As we suspected, our examination of Metalpha Technology Holding revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Metalpha Technology Holding you should know about.
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.
