The RealReal, Inc.'s (NASDAQ:REAL) price-to-sales (or "P/S") ratio of 1.2x may not look like an appealing investment opportunity when you consider close to half the companies in the Specialty Retail industry in the United States have P/S ratios below 0.4x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for RealReal
What Does RealReal's Recent Performance Look Like?
Recent times have been advantageous for RealReal as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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 RealReal will help you uncover what's on the horizon.Is There Enough Revenue Growth Forecasted For RealReal?
The only time you'd be truly comfortable seeing a P/S as high as RealReal's is when the company's growth is on track to outshine the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 9.3% last year. The solid recent performance means it was also able to grow revenue by 28% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.
Looking ahead now, revenue is anticipated to climb by 9.7% each year during the coming three years according to the eight analysts following the company. That's shaping up to be materially higher than the 5.6% per annum growth forecast for the broader industry.
With this information, we can see why RealReal is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
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.
We've established that RealReal maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Specialty Retail industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.
You need to take note of risks, for example - RealReal has 4 warning signs (and 1 which is potentially serious) we think you should know about.
If you're unsure about the strength of RealReal's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.