There are many different measures out there to value a stock, but no one magic bullet. However, one tool that can be very helpful to investors is the price-to-sales (P/S) ratio. Unlike the commonly used price-to-earnings (P/E) ratio, P/S is almost always meaningful, since sales remain above zero even in quarters when profits may dwindle. Also, it's less prone to the manipulation and one-time gains that can plague other measures used to value companies.
Today, we'll look at companies in the IT industry with the highest P/S ratios. Are they overpriced dogs, or are other factors at work here?
|
Company Name |
Price-to-Sales |
|---|---|
|
Universal Display |
28.8 |
|
Rubicon Technology |
25.5 |
|
Baidu |
24.7 |
|
Rambus |
18.8 |
|
MercadoLibre |
14.5 |
|
SolarWinds |
12.9 |
|
Sycamore Networks |
12.6 |
Source: CapitalIQ, a division of Standard & Poor's.
All of these companies have unique factors that place their price-to-sales ratios well above industry norms. For example, Universal Display holds patent technology on OLED screens that could potentially be the basis for the next wave of consumer electronics. Rambus also controls a high number of patents that are highly valued within the technology realm. MercadoLibre and Baidu are both top performers in emerging markets, growing at torrid clips.
Yet these unique circumstances alone don't always justify the high multiples these companies are commanding. Fool contributor Rick Munarriz recently took Baidu to the woodshed because the company's valuation had passed his comfort zone. In the case of Universal Display, its growth always seems to be "just around the corner;" the company has failed to gain traction in widespread commercial adoption of its products.
So while a high P/S ratio might not preclude a company from deserving your investing dollar, it's definitely a warning sign that investors should conduct more research and understand the risks of these stocks.
Motley Fool CAPS makes a great place to start your research on stocks from the IT world or any other sector. You can see what the rest of the community has to say about all these stocks listed above, dig through financial statements, or let your voice be heard by rating the companies you're following.
