Optimistic Investors Push Silicon Laboratories Inc. (NASDAQ:SLAB) Shares Up 45% But Growth Is Lacking

Silicon Laboratories Inc. (NASDAQ:SLAB) shareholders are no doubt pleased to see that the share price has bounced 45% in the last month, although it is still struggling to make up recently lost ground. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Following the firm bounce in price, Silicon Laboratories may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 6.5x, when you consider almost half of the companies in the Semiconductor industry in the United States have P/S ratios under 3.9x and even P/S lower than 1.6x aren't out of the ordinary. 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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View our latest analysis for Silicon Laboratories

How Has Silicon Laboratories Performed Recently?

Silicon Laboratories 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 undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Silicon Laboratories?

In order to justify its P/S ratio, Silicon Laboratories would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 3.2% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 18% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 27% during the coming year according to the nine analysts following the company. With the industry predicted to deliver 35% growth, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Silicon Laboratories' P/S is outpacing its industry peers. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

Shares in Silicon Laboratories have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It comes as a surprise to see Silicon Laboratories trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 1 warning sign for Silicon Laboratories that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.