You may think that with a price-to-sales (or "P/S") ratio of 14.6x Marathon Digital Holdings, Inc. (NASDAQ:MARA) is a stock to avoid completely, seeing as almost half of all the Software companies in the United States have P/S ratios under 4.2x and even P/S lower than 1.8x 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.
What Does Marathon Digital Holdings' P/S Mean For Shareholders?
While the industry has experienced revenue growth lately, Marathon Digital Holdings' revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Marathon Digital Holdings.
How Is Marathon Digital Holdings' Revenue Growth Trending?
In order to justify its P/S ratio, Marathon Digital Holdings would need to produce outstanding growth that's well in excess of the industry.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 26%. In spite of this, the company still managed to deliver immense revenue growth over the last three years. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.
Turning to the outlook, the next three years should generate growth of 68% per annum as estimated by the six analysts watching the company. That's shaping up to be materially higher than the 13% per annum growth forecast for the broader industry.
With this information, we can see why Marathon Digital Holdings 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
We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our look into Marathon Digital Holdings shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.
We don't want to rain on the parade too much, but we did also find 3 warning signs for Marathon Digital Holdings (2 are concerning!) that you need to be mindful of.
If you're unsure about the strength of Marathon Digital Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here