When you see that almost half of the companies in the Semiconductor industry in the United States have price-to-sales ratios (or "P/S") below 3.3x, Marvell Technology, Inc. (NASDAQ:MRVL) looks to be giving off strong sell signals with its 5.8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
What Does Marvell Technology's Recent Performance Look Like?
Marvell Technology certainly has been doing a good job lately as it's been growing revenue more 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.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Marvell Technology.
Is There Enough Revenue Growth Forecasted For Marvell Technology?
Marvell Technology's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.
Taking a look back first, we see that the company grew revenue by an impressive 33% last year. Pleasingly, revenue has also lifted 119% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.
Turning to the outlook, the next three years should generate growth of 7.8% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 10% per annum, which is noticeably more attractive.
With this in consideration, we believe it doesn't make sense that Marvell Technology's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.
What We Can Learn From Marvell Technology's 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.
It comes as a surprise to see Marvell Technology trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Marvell Technology with six simple checks on some of these key factors.
If these risks are making you reconsider your opinion on Marvell Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.
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