Why We're Not Concerned Yet About Red Cat Holdings, Inc.'s (NASDAQ:RCAT) 34% Share Price Plunge
Red Cat Holdings, Inc. (NASDAQ:RCAT) shares have dropped 34% recently, but this decline is minor compared to a 1,294% increase over the past year. The company's high price-to-sales (P/S) ratio of 45.5x suggests strong revenue growth expectations, as it has seen a 95% revenue increase last year and is projected to grow by 325% next year. Despite the recent price drop, investor confidence in future revenues keeps the P/S elevated, indicating potential stability in share prices. However, there are risks to consider, including identified warning signs for the company.
Red Cat Holdings, Inc. (NASDAQ:RCAT) shares have retraced a considerable 34% in the last month, reversing a fair amount of their solid recent performance. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 1,294% in the last year.
In spite of the heavy fall in price, you could still be forgiven for thinking Red Cat Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 45.5x, considering almost half the companies in the United States' Electronic industry have P/S ratios below 2.2x. 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.
Check out our latest analysis for Red Cat Holdings
How Has Red Cat Holdings Performed Recently?
Recent times have been advantageous for Red Cat Holdings as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Want the full picture on analyst estimates for the company? Then our free report on Red Cat Holdings will help you uncover what's on the horizon.
How Is Red Cat Holdings' Revenue Growth Trending?
The only time you'd be truly comfortable seeing a P/S as steep as Red Cat Holdings' is when the company's growth is on track to outshine the industry decidedly.
Taking a look back first, we see that the company grew revenue by an impressive 95% last year. The latest three year period has also seen an excellent 126% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.
Looking ahead now, revenue is anticipated to climb by 325% during the coming year according to the sole analyst following the company. With the industry only predicted to deliver 9.5%, the company is positioned for a stronger revenue result.
With this information, we can see why Red Cat Holdings is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What Does Red Cat Holdings' P/S Mean For Investors?
Red Cat Holdings' shares may have suffered, but its P/S remains high. 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.
Our look into Red Cat Holdings shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Red Cat Holdings (1 is potentially serious) you should be aware of.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
