There's Reason For Concern Over Ambarella, Inc.'s (NASDAQ:AMBA) Massive 32% Price Jump

Despite an already strong run, Ambarella, Inc. (NASDAQ:AMBA) shares have been powering on, with a gain of 32% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 4.0% isn't as attractive.

After such a large jump in price, Ambarella may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 9x, when you consider almost half of the companies in the Semiconductor industry in the United States have P/S ratios under 4.1x and even P/S lower than 1.9x aren't out of the ordinary. 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.

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View our latest analysis for Ambarella

What Does Ambarella's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Ambarella has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Ambarella's Revenue Growth Trending?

Ambarella'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 45% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 10% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 16% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 21% each year growth forecast for the broader industry.

With this information, we find it concerning that Ambarella 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. 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 Bottom Line On Ambarella's P/S

Shares in Ambarella have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've concluded that Ambarella currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. 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. At these price levels, investors should remain cautious, particularly if things don't improve.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Ambarella you should know about.

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.