adidas AG Faces Investor Concerns as Price-to-Sales Ratio Raises Red Flags

In the world of German luxury companies, where nearly half boast price-to-sales ratios (P/S) below 0.8x, adidas AG (ETR:ADS) is standing out with a 1.5x P/S ratio, prompting some investors to consider exit strategies.

While this elevated ratio may trigger sell signals, a deeper analysis is required to assess the rational basis behind it.

The P/S ratio, a key financial metric, is raising concerns among shareholders, particularly as the luxury industry in Germany experiences a trend of P/S ratios below 0.8x. For adidas, the 1.5x P/S ratio demands scrutiny to determine if there are justifiable reasons behind this valuation.

Adidas’ recent revenue trajectory, moving in reverse while the industry witnesses growth, adds to the apprehension among investors. The high P/S ratio suggests that some may be speculating on a potential turnaround in the company’s revenue performance. However, if this optimism falters, existing shareholders might become increasingly wary of the share’s viability.

The outlook for adidas becomes crucial in assessing its P/S ratio. Typically, a high P/S ratio is expected for a company poised for robust growth, outperforming its industry peers.

A closer examination of the company’s financials over the past year reveals a concerning 2.8% decline in revenue. However, a broader perspective shows a commendable 14% aggregate growth over the past three years, stemming from an earlier period of expansion. While shareholders would prefer sustained growth, the medium-term rates of revenue growth offer a degree of satisfaction.

Looking ahead, analysts predict an 8.0% annual revenue increase for the next three years, aligning closely with the industry’s anticipated 7.7% growth. Despite these projections, adidas maintains an elevated P/S compared to its industry counterparts, raising questions about investor optimism and willingness to pay a premium for the stock.

Investors should tread cautiously, considering the disparity between adidas’ growth expectations and the elevated P/S ratio. While this metric is not the sole determinant in investment decisions, it reflects the market’s sentiments. If the company fails to surpass industry growth in the short term, maintaining the current share price could prove challenging, potentially leading to disappointment for investors who paid a premium based on optimistic expectations.