Price-to-Sales ratio: Valuing high-growth companies
The price-to-sales ratio has become essential for valuing high-growth and unprofitable companies that dominate today's market. The current S&P 500 P/S ratio sits at 3.45x—near all-time highs and 90% above its historical mean of 1.81x. For investors evaluating SaaS disruptors, AI infrastructure plays, and pre-profit technology companies, understanding the meaning of the price-to-sales ratio separates informed decisions from speculation. This guide provides the formulas, sector benchmarks, and real company examples needed to use revenue multiples effectively in 2025-2026.
Mastering fundamental analysis tools helps Indian investors apply the P/S ratio alongside other metrics for comprehensive stock evaluation.
The P/S ratio formula and how to calculate it
The price-to-sales ratio measures how much investors pay for each dollar of a company's revenue. Two mathematically equivalent methods exist for PS ratio calculation:
Method 1 — Per-share calculation: P/S Ratio = Market Price per Share ÷ Revenue per Share
Method 2 — Market cap calculation: P/S Ratio = Market Capitalisation ÷ Total Annual Revenue
Both methods yield identical results. Market cap equals price multiplied by shares outstanding. Revenue per share equals total revenue divided by the number of shares outstanding. Most analysts prefer the market-cap method for its simplicity.
Step-by-step calculation example: Consider three companies with identical $2 billion market caps but different revenue bases:
- Company A: $1.5B revenue → P/S = 1.3x
- Company B: $1.3B revenue → P/S = 1.5x
- Company C: $1.1B revenue → P/S = 1.8x
The company with the lowest P/S (Company A) offers the most revenue per dollar of market value. However, this alone doesn't make it a better investment.
Finding revenue in SEC filings: Revenue appears as the top-line item on the Income Statement, located in Item 8 of 10-K annual reports and quarterly 10-Q filings. The SEC's EDGAR database provides free access to all public company filings.
TTM vs forward P/S: Trailing Twelve Months (TTM) P/S uses historical revenue from the past four quarters. Forward P/S uses analyst consensus estimates for the next 12 months. For high-growth stocks, forward P/S is typically 20-40% lower than TTM P/S, reflecting expected revenue growth.
When to use the P/S ratio for stock valuation
The P/S ratio shines where earnings-based metrics break down. For unprofitable companies, P/E ratios become mathematically undefined or negative.
Understanding how the P/E ratio works provides essential context for recognising when P/S offers advantages for growth stock analysis.
P/S remains calculable regardless of profitability, making it essential for early-stage growth companies that are heavily reinvesting in customer acquisition.
Key advantages over the P/E ratio:
- Always calculable when companies report negative or zero earnings
- Less manipulation-prone since revenue recognition rules are stricter than earnings accounting
- More stable because revenue fluctuates less than earnings
- Internationally comparable due to more consistent revenue recognition across accounting standards
Industries where the P/S ratio works best:
P/S proves most useful for SaaS and software companies with recurring revenue models and gross margins exceeding 70%. Biotech firms benefit from P/S analysis because R&D investment delays profitability for years. Early-stage technology companies valued on sales traction rather than current profits also suit the P/S evaluation. The median EV/Revenue for biotech reached 12.97x in 2023, with some companies exceeding 30x.
When the P/S ratio fails, financial services, including banks and insurance companies, require entirely different metrics. For banks, revenue includes interest income, which depends heavily on the rate environment and the size of their balance sheets. The concept of revenue differs fundamentally from that of operating companies. The Price-to-Book ratio remains the preferred metric for financial institutions, as debt serves as raw material rather than capital for banks.
High-growth company valuation with revenue multiples
For high-growth stocks, traditional valuation frameworks systematically undervalue future potential. Standard DCF models penalise distant cash flows through discounting. EBITDA multiples punish companies making strategic growth investments. Sales multiple valuation captures revenue traction when profitability remains years away.
The relationship between growth rate and acceptable P/S multiple follows a clear pattern:
| Revenue Growth Rate | Typical P/S Range | Real-World Examples |
|---|---|---|
| Below 15% (Low) | 2x - 5x | Mature SaaS, legacy software |
| 15-30% (Moderate) | 5x - 12x | Salesforce (~10%), ServiceNow |
| 30-50% (High) | 12x - 25x | CrowdStrike (~22%), MongoDB |
| 50-80% (Hyper) | 20x - 40x | Snowflake, early Datadog |
| Above 80% | 40x+ | Palantir (~63% acceleration) |
The Rule of 40 states that a healthy SaaS company's combined growth rate and profitability should equal at least 40%. Companies exceeding the Rule of 40 earn an average valuation premium of 121%. Each 10-point improvement is associated with approximately a 1.1x increase in EV/Revenue multiples.
Bessemer Venture Partners' newer Rule of X framework weights growth 2-3x more heavily than profitability. Their research shows a 62% correlation between Rule of X scores and valuation multiples, versus only 50% for the traditional Rule of 40.
Current SaaS benchmarks (December 2025):
- Public SaaS median EV/Revenue: 5.1x
- BVP Nasdaq Emerging Cloud Index: 6-7x forward revenue
- Private SaaS median: 4.8-5.3x ARR
- Peak (November 2021): 18-19x median
The collapse from 2021 peaks to current levels represents a 73% compression in median multiples. Companies with Net Revenue Retention above 120% still command premiums exceeding 11.7x revenue.
Valuing loss-making companies when earnings don't exist
When companies lack profits, P/S becomes the primary valuation anchor. About 42-46% of Russell 2000 companies are currently unprofitable—up from 14% two decades ago. This makes revenue multiples more relevant than ever.
Amazon's P/S journey: At its 2000 dot-com peak, Amazon traded at approximately 147x sales—an extreme few would consider rational today. By January 2003, when Amazon finally achieved profitability, its market cap was $7.3 billion against TTM revenue of $3.9 billion. This yielded a P/S of just 1.8x. Today, Amazon trades at 3.64x sales, near its 20-year average of 2.94x. Investors who recognised the scalable unit economics of e-commerce captured enormous returns.
Tesla's transformation: During its unprofitable years from 2015 to 2019, Tesla traded at roughly 3x sales. Traditional automakers' P/E ratios in single digits seemed to miss the point. At its 2020 peak, Tesla's P/E exceeded 940x while P/S expanded to 15-20x. Those who understood Tesla as a technology company correctly identified why P/S was the appropriate lens.
Limitations when using P/S for loss-makers:
- Cash burn remains invisible in the ratio
- No path to profitability assessment exists
- Margin blindness treats 80% gross margin companies the same as 20% margin businesses
- WeWork showed how high P/S can ignore unsustainable unit economics
Sector comparisons: P/S benchmarks by industry
Professor Aswath Damodaran's data from NYU Stern provides authoritative sector-by-sector P/S benchmarks:
| Sector | P/S Ratio | Net Margin | What Constitutes High |
|---|---|---|---|
| Software (System & Application) | 11.20x | 22.94% | Above 8x |
| Semiconductors | 14.26x | 19.96% | Above 10x |
| Biotechnology | 6.11x | -13.20% | Above 5x |
| Pharmaceuticals | 4.84x | 8.90% | Above 5x |
| Computers/Peripherals | 6.46x | 16.78% | Above 6x |
| Retail (General) | 1.94x | 4.60% | Above 2x |
| Retail (Grocery) | 0.36x | 1.97% | Above 0.5x |
| Restaurants | 3.69x | 10.62% | Above 3x |
| Auto & Truck | 2.94x | 3.77% | Above 3x |
S&P 500 P/S ratio context: The current 3.45x is approximately at the 99th percentile historically. This compares to December 1999's dot-com peak of 3.41x. The historical mean is 1.81x, and the median is 1.64x. Today's market trades at roughly double the typical valuation relative to sales.
Why sectors have structurally different P/S ratios: High P/S sectors share common characteristics. Software maintains 23% net margins while tobacco reaches 32%. Scalability allows revenue growth without proportional cost increases. Recurring revenue models and network effects justify premium valuations. Low P/S sectors like grocery retail (0.36x) and food wholesalers (0.31x) operate on razor-thin margins of 1-2%, where revenue translates into minimal profit.
Real company P/S ratios: Magnificent 7 and high-growth tech
Current P/S ratios for major technology companies reveal dramatic divergence in how markets value different growth profiles:
| Company | P/S (TTM) | Forward P/S | Revenue Growth | vs. Historical |
|---|---|---|---|---|
| Palantir | 100-112x | ~55x | +63% | +350-400% above |
| Nvidia | 24x | ~18x | +67% | +50% above |
| CrowdStrike | 28-33x | ~22x | +22% | +30% above |
| Tesla | 16-18x | ~11x | -2.5% | +125-150% above |
| Snowflake | 17x | ~12x | +28% | -31% below |
| Microsoft | 11.6x | ~10x | +15% | +22% above |
| Apple | 9.2x | ~7.8x | +6% | +48% above |
| Alphabet | 9.1x | ~7.5x | +13% | +40% above |
| Meta | 8.3x | ~7x | +21% | +50% above |
| Salesforce | 6.1x | ~5x | +10% | -18% below |
| Amazon | 3.6x | ~3x | +11% | +8% above |
Palantir stands as the extreme outlier at 100x+ sales—higher than any major software company in history. With only 30% street growth estimates, this valuation implies expectations of sustained hyper-growth that few companies have delivered.
Amazon offers the best relative value among the Magnificent 7 at 3.6x sales. This sits only 8% above its 10-year median and well below its 2020 peak of 4.32x. With $638 billion in TTM revenue and improving AWS margins, revenue scale naturally compresses multiples.
Salesforce and Snowflake trade below historical medians, potentially representing value opportunities if growth stabilises. Salesforce at 6x versus its 7.66x historical median suggests mature SaaS valuations have reset expectations.
Revenue multiples in M&A transactions
Acquirers use revenue multiples extensively because many targets—especially in technology—lack profits. The 2024-2025 M&A landscape reveals clear patterns:
Software M&A multiples (2024):
- All software: Median 2.6x revenue, Average 6.4x
- SaaS-only deals: Median 4.1x revenue (57% premium over all software)
- EBITDA multiples: SaaS median 19.2x
Cybersecurity commands premium multiples: Private cybersecurity startups averaged 15.2x revenue in 2025. M&A deals reached 16.3x while cloud security transactions exceeded 21.7x on average—up to 35.5x for strategic acquisitions.
Notable recent transactions:
- Google/Wiz: $32 billion for cloud security leader
- J&J/Intra-Cellular: $14.6 billion (~21x the $680M revenue)
- Sanofi/Blueprint Medicines: $9.5 billion (~20x the $479M revenue)
- ServiceNow/Moveworks: $2.85 billion for AI-driven automation
Private vs public valuation gap: Private SaaS companies typically trade at 20-30% discounts to public comparables. The current median shows public SaaS at 6.1-7.5x revenue, versus private SaaS at 3.8-4.1x revenue. This reflects the liquidity premium investors pay for public markets.
Limitations and context: when the P/S ratio misleads
Despite its utility, P/S has significant blind spots that can lead to costly errors.
The profitability blind spot represents the most dangerous limitation. A company with $1 billion in revenue but annual losses of $100 million could appear cheap on P/S while destroying shareholder value. Consider two companies with identical 3x P/S ratios: a software company generating $4 profit per $10 of sales versus a construction company generating $0.50 per $10 of sales. The P/S ratio treats them identically despite dramatically different economics.
Debt remains invisible to P/S. The ratio uses market capitalisation (equity only), ignoring leverage entirely. Two companies with identical P/S but different debt loads carry different risk profiles. EV/Sales (Enterprise Value to Sales) solves this by including debt in the numerator. Institutional analysts prefer EV/Sales for this reason.
Same-industry comparison is mandatory. A 3x P/S appears expensive for grocery retail (sector median: 0.36x), but cheap for software (sector median: 11.2x). Cross-industry P/S comparisons without margin context produce meaningless results.
Revenue quality matters enormously. Recurring subscription revenue commands premium multiples versus one-time transactional sales. SaaS companies with Net Revenue Retention above 120% routinely trade at 10x+ revenue. Transactional businesses with identical growth might deserve only 4-5x.
The PSG ratio applies PEG ratio logic to sales: PSG = (P/S) ÷ Expected Revenue Growth Rate. A PSG below 0.5 suggests undervaluation, while above 1.0 suggests potential overvaluation. Current examples show Microsoft at approximately 0.67 (undervalued) versus Palantir at approximately 2.2 (expensive).
The P/S ratio has evolved from a niche tool to an essential valuation framework. The median public SaaS company trades at 5.1x revenue today—down 73% from 2021 peaks but still above pre-pandemic levels. For practitioners, contextual application remains the key insight: a 10x P/S for a 60% growth SaaS company with 75% gross margins and 120%+ NRR may be cheap. The same multiple for a 15% growth company with 40% margins represents significant overvaluation. Understanding what that revenue can become—not just what it is today—separates successful analysis from mechanical formula application.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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Table of Contents
The price-to-sales ratio has become essential for valuing high-growth and unprofitable companies that dominate today's market. The current S&P 500 P/S ratio sits at 3.45x—near all-time highs and 90% above its historical mean of 1.81x. For investors evaluating SaaS disruptors, AI infrastructure plays, and pre-profit technology companies, understanding the meaning of the price-to-sales ratio separates informed decisions from speculation. This guide provides the formulas, sector benchmarks, and real company examples needed to use revenue multiples effectively in 2025-2026.
Mastering fundamental analysis tools helps Indian investors apply the P/S ratio alongside other metrics for comprehensive stock evaluation.
The P/S ratio formula and how to calculate it
The price-to-sales ratio measures how much investors pay for each dollar of a company's revenue. Two mathematically equivalent methods exist for PS ratio calculation:
Method 1 — Per-share calculation: P/S Ratio = Market Price per Share ÷ Revenue per Share
Method 2 — Market cap calculation: P/S Ratio = Market Capitalisation ÷ Total Annual Revenue
Both methods yield identical results. Market cap equals price multiplied by shares outstanding. Revenue per share equals total revenue divided by the number of shares outstanding. Most analysts prefer the market-cap method for its simplicity.
Step-by-step calculation example: Consider three companies with identical $2 billion market caps but different revenue bases:
- Company A: $1.5B revenue → P/S = 1.3x
- Company B: $1.3B revenue → P/S = 1.5x
- Company C: $1.1B revenue → P/S = 1.8x
The company with the lowest P/S (Company A) offers the most revenue per dollar of market value. However, this alone doesn't make it a better investment.
Finding revenue in SEC filings: Revenue appears as the top-line item on the Income Statement, located in Item 8 of 10-K annual reports and quarterly 10-Q filings. The SEC's EDGAR database provides free access to all public company filings.
TTM vs forward P/S: Trailing Twelve Months (TTM) P/S uses historical revenue from the past four quarters. Forward P/S uses analyst consensus estimates for the next 12 months. For high-growth stocks, forward P/S is typically 20-40% lower than TTM P/S, reflecting expected revenue growth.
When to use the P/S ratio for stock valuation
The P/S ratio shines where earnings-based metrics break down. For unprofitable companies, P/E ratios become mathematically undefined or negative.
Understanding how the P/E ratio works provides essential context for recognising when P/S offers advantages for growth stock analysis.
P/S remains calculable regardless of profitability, making it essential for early-stage growth companies that are heavily reinvesting in customer acquisition.
Key advantages over the P/E ratio:
- Always calculable when companies report negative or zero earnings
- Less manipulation-prone since revenue recognition rules are stricter than earnings accounting
- More stable because revenue fluctuates less than earnings
- Internationally comparable due to more consistent revenue recognition across accounting standards
Industries where the P/S ratio works best:
P/S proves most useful for SaaS and software companies with recurring revenue models and gross margins exceeding 70%. Biotech firms benefit from P/S analysis because R&D investment delays profitability for years. Early-stage technology companies valued on sales traction rather than current profits also suit the P/S evaluation. The median EV/Revenue for biotech reached 12.97x in 2023, with some companies exceeding 30x.
When the P/S ratio fails, financial services, including banks and insurance companies, require entirely different metrics. For banks, revenue includes interest income, which depends heavily on the rate environment and the size of their balance sheets. The concept of revenue differs fundamentally from that of operating companies. The Price-to-Book ratio remains the preferred metric for financial institutions, as debt serves as raw material rather than capital for banks.
High-growth company valuation with revenue multiples
For high-growth stocks, traditional valuation frameworks systematically undervalue future potential. Standard DCF models penalise distant cash flows through discounting. EBITDA multiples punish companies making strategic growth investments. Sales multiple valuation captures revenue traction when profitability remains years away.
The relationship between growth rate and acceptable P/S multiple follows a clear pattern:
| Revenue Growth Rate | Typical P/S Range | Real-World Examples |
|---|---|---|
| Below 15% (Low) | 2x - 5x | Mature SaaS, legacy software |
| 15-30% (Moderate) | 5x - 12x | Salesforce (~10%), ServiceNow |
| 30-50% (High) | 12x - 25x | CrowdStrike (~22%), MongoDB |
| 50-80% (Hyper) | 20x - 40x | Snowflake, early Datadog |
| Above 80% | 40x+ | Palantir (~63% acceleration) |
The Rule of 40 states that a healthy SaaS company's combined growth rate and profitability should equal at least 40%. Companies exceeding the Rule of 40 earn an average valuation premium of 121%. Each 10-point improvement is associated with approximately a 1.1x increase in EV/Revenue multiples.
Bessemer Venture Partners' newer Rule of X framework weights growth 2-3x more heavily than profitability. Their research shows a 62% correlation between Rule of X scores and valuation multiples, versus only 50% for the traditional Rule of 40.
Current SaaS benchmarks (December 2025):
- Public SaaS median EV/Revenue: 5.1x
- BVP Nasdaq Emerging Cloud Index: 6-7x forward revenue
- Private SaaS median: 4.8-5.3x ARR
- Peak (November 2021): 18-19x median
The collapse from 2021 peaks to current levels represents a 73% compression in median multiples. Companies with Net Revenue Retention above 120% still command premiums exceeding 11.7x revenue.
Valuing loss-making companies when earnings don't exist
When companies lack profits, P/S becomes the primary valuation anchor. About 42-46% of Russell 2000 companies are currently unprofitable—up from 14% two decades ago. This makes revenue multiples more relevant than ever.
Amazon's P/S journey: At its 2000 dot-com peak, Amazon traded at approximately 147x sales—an extreme few would consider rational today. By January 2003, when Amazon finally achieved profitability, its market cap was $7.3 billion against TTM revenue of $3.9 billion. This yielded a P/S of just 1.8x. Today, Amazon trades at 3.64x sales, near its 20-year average of 2.94x. Investors who recognised the scalable unit economics of e-commerce captured enormous returns.
Tesla's transformation: During its unprofitable years from 2015 to 2019, Tesla traded at roughly 3x sales. Traditional automakers' P/E ratios in single digits seemed to miss the point. At its 2020 peak, Tesla's P/E exceeded 940x while P/S expanded to 15-20x. Those who understood Tesla as a technology company correctly identified why P/S was the appropriate lens.
Limitations when using P/S for loss-makers:
- Cash burn remains invisible in the ratio
- No path to profitability assessment exists
- Margin blindness treats 80% gross margin companies the same as 20% margin businesses
- WeWork showed how high P/S can ignore unsustainable unit economics
Sector comparisons: P/S benchmarks by industry
Professor Aswath Damodaran's data from NYU Stern provides authoritative sector-by-sector P/S benchmarks:
| Sector | P/S Ratio | Net Margin | What Constitutes High |
|---|---|---|---|
| Software (System & Application) | 11.20x | 22.94% | Above 8x |
| Semiconductors | 14.26x | 19.96% | Above 10x |
| Biotechnology | 6.11x | -13.20% | Above 5x |
| Pharmaceuticals | 4.84x | 8.90% | Above 5x |
| Computers/Peripherals | 6.46x | 16.78% | Above 6x |
| Retail (General) | 1.94x | 4.60% | Above 2x |
| Retail (Grocery) | 0.36x | 1.97% | Above 0.5x |
| Restaurants | 3.69x | 10.62% | Above 3x |
| Auto & Truck | 2.94x | 3.77% | Above 3x |
S&P 500 P/S ratio context: The current 3.45x is approximately at the 99th percentile historically. This compares to December 1999's dot-com peak of 3.41x. The historical mean is 1.81x, and the median is 1.64x. Today's market trades at roughly double the typical valuation relative to sales.
Why sectors have structurally different P/S ratios: High P/S sectors share common characteristics. Software maintains 23% net margins while tobacco reaches 32%. Scalability allows revenue growth without proportional cost increases. Recurring revenue models and network effects justify premium valuations. Low P/S sectors like grocery retail (0.36x) and food wholesalers (0.31x) operate on razor-thin margins of 1-2%, where revenue translates into minimal profit.
Real company P/S ratios: Magnificent 7 and high-growth tech
Current P/S ratios for major technology companies reveal dramatic divergence in how markets value different growth profiles:
| Company | P/S (TTM) | Forward P/S | Revenue Growth | vs. Historical |
|---|---|---|---|---|
| Palantir | 100-112x | ~55x | +63% | +350-400% above |
| Nvidia | 24x | ~18x | +67% | +50% above |
| CrowdStrike | 28-33x | ~22x | +22% | +30% above |
| Tesla | 16-18x | ~11x | -2.5% | +125-150% above |
| Snowflake | 17x | ~12x | +28% | -31% below |
| Microsoft | 11.6x | ~10x | +15% | +22% above |
| Apple | 9.2x | ~7.8x | +6% | +48% above |
| Alphabet | 9.1x | ~7.5x | +13% | +40% above |
| Meta | 8.3x | ~7x | +21% | +50% above |
| Salesforce | 6.1x | ~5x | +10% | -18% below |
| Amazon | 3.6x | ~3x | +11% | +8% above |
Palantir stands as the extreme outlier at 100x+ sales—higher than any major software company in history. With only 30% street growth estimates, this valuation implies expectations of sustained hyper-growth that few companies have delivered.
Amazon offers the best relative value among the Magnificent 7 at 3.6x sales. This sits only 8% above its 10-year median and well below its 2020 peak of 4.32x. With $638 billion in TTM revenue and improving AWS margins, revenue scale naturally compresses multiples.
Salesforce and Snowflake trade below historical medians, potentially representing value opportunities if growth stabilises. Salesforce at 6x versus its 7.66x historical median suggests mature SaaS valuations have reset expectations.
Revenue multiples in M&A transactions
Acquirers use revenue multiples extensively because many targets—especially in technology—lack profits. The 2024-2025 M&A landscape reveals clear patterns:
Software M&A multiples (2024):
- All software: Median 2.6x revenue, Average 6.4x
- SaaS-only deals: Median 4.1x revenue (57% premium over all software)
- EBITDA multiples: SaaS median 19.2x
Cybersecurity commands premium multiples: Private cybersecurity startups averaged 15.2x revenue in 2025. M&A deals reached 16.3x while cloud security transactions exceeded 21.7x on average—up to 35.5x for strategic acquisitions.
Notable recent transactions:
- Google/Wiz: $32 billion for cloud security leader
- J&J/Intra-Cellular: $14.6 billion (~21x the $680M revenue)
- Sanofi/Blueprint Medicines: $9.5 billion (~20x the $479M revenue)
- ServiceNow/Moveworks: $2.85 billion for AI-driven automation
Private vs public valuation gap: Private SaaS companies typically trade at 20-30% discounts to public comparables. The current median shows public SaaS at 6.1-7.5x revenue, versus private SaaS at 3.8-4.1x revenue. This reflects the liquidity premium investors pay for public markets.
Limitations and context: when the P/S ratio misleads
Despite its utility, P/S has significant blind spots that can lead to costly errors.
The profitability blind spot represents the most dangerous limitation. A company with $1 billion in revenue but annual losses of $100 million could appear cheap on P/S while destroying shareholder value. Consider two companies with identical 3x P/S ratios: a software company generating $4 profit per $10 of sales versus a construction company generating $0.50 per $10 of sales. The P/S ratio treats them identically despite dramatically different economics.
Debt remains invisible to P/S. The ratio uses market capitalisation (equity only), ignoring leverage entirely. Two companies with identical P/S but different debt loads carry different risk profiles. EV/Sales (Enterprise Value to Sales) solves this by including debt in the numerator. Institutional analysts prefer EV/Sales for this reason.
Same-industry comparison is mandatory. A 3x P/S appears expensive for grocery retail (sector median: 0.36x), but cheap for software (sector median: 11.2x). Cross-industry P/S comparisons without margin context produce meaningless results.
Revenue quality matters enormously. Recurring subscription revenue commands premium multiples versus one-time transactional sales. SaaS companies with Net Revenue Retention above 120% routinely trade at 10x+ revenue. Transactional businesses with identical growth might deserve only 4-5x.
The PSG ratio applies PEG ratio logic to sales: PSG = (P/S) ÷ Expected Revenue Growth Rate. A PSG below 0.5 suggests undervaluation, while above 1.0 suggests potential overvaluation. Current examples show Microsoft at approximately 0.67 (undervalued) versus Palantir at approximately 2.2 (expensive).
The P/S ratio has evolved from a niche tool to an essential valuation framework. The median public SaaS company trades at 5.1x revenue today—down 73% from 2021 peaks but still above pre-pandemic levels. For practitioners, contextual application remains the key insight: a 10x P/S for a 60% growth SaaS company with 75% gross margins and 120%+ NRR may be cheap. The same multiple for a 15% growth company with 40% margins represents significant overvaluation. Understanding what that revenue can become—not just what it is today—separates successful analysis from mechanical formula application.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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Invest in 11,000+ US stocks & ETFs
