Getting In Cheap On American Well Corporation (NYSE:AMWL) Is Unlikely
With a median price-to-sales (or "P/S") ratio of close to 2.3x in the Healthcare Services industry in the United States, you could be forgiven for feeling indifferent about American Well Corporation's (NYSE:AMWL) P/S ratio of 2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
Check out our latest analysis for American Well
How American Well Has Been Performing
With revenue growth that's inferior to most other companies of late, American Well has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.
Keen to find out how analysts think American Well's future stacks up against the industry? In that case, our free report is a great place to start.
How Is American Well's Revenue Growth Trending?
The only time you'd be comfortable seeing a P/S like American Well's is when the company's growth is tracking the industry closely.
Taking a look back first, we see that the company managed to grow revenues by a handy 6.8% last year. Pleasingly, revenue has also lifted 64% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.
Turning to the outlook, the next three years should generate growth of 12% each year as estimated by the eleven analysts watching the company. With the industry predicted to deliver 18% growth per annum, the company is positioned for a weaker revenue result.
In light of this, it's curious that American Well's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.
What We Can Learn From American Well's P/S?
Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
When you consider that American Well's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
You always need to take note of risks, for example - American Well has 3 warning signs we think you should be aware of.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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.
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