LendingTree, Inc. (NASDAQ:TREE) Stock Catapults 31% Though Its Price And Business Still Lag The Industry

The LendingTree, Inc. (NASDAQ:TREE) share price has done very well over the last month, posting an excellent gain of 31%. The last 30 days bring the annual gain to a very sharp 33%.

Although its price has surged higher, given about half the companies operating in the United States' Consumer Finance industry have price-to-sales ratios (or "P/S") above 1.6x, you may still consider LendingTree as an attractive investment with its 0.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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See our latest analysis for LendingTree

How LendingTree Has Been Performing

Recent times have been advantageous for LendingTree as its revenues have been rising faster than most other companies. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like LendingTree's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 34% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 18% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 8.4% per year during the coming three years according to the seven analysts following the company. That's shaping up to be materially lower than the 15% per annum growth forecast for the broader industry.

With this in consideration, its clear as to why LendingTree's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Despite LendingTree's share price climbing recently, its P/S still lags most other companies. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of LendingTree's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 1 warning sign for LendingTree you should know about.

If you're unsure about the strength of LendingTree'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.