Getting In Cheap On Arcus Biosciences, Inc. (NYSE:RCUS) Is Unlikely
With a median price-to-sales (or "P/S") ratio of close to 11.6x in the Biotechs industry in the United States, you could be forgiven for feeling indifferent about Arcus Biosciences, Inc.'s (NYSE:RCUS) P/S ratio of 12.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
View our latest analysis for Arcus Biosciences
How Has Arcus Biosciences Performed Recently?
While the industry has experienced revenue growth lately, Arcus Biosciences' revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying to much for the stock.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Arcus Biosciences.
Is There Some Revenue Growth Forecasted For Arcus Biosciences?
Arcus Biosciences' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 71%. In spite of this, the company still managed to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company, but investors will want to ask why it is now in decline.
Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 15% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 97% each year, which is noticeably more attractive.
With this in mind, we find it intriguing that Arcus Biosciences' P/S is closely matching its industry peers. 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.
The Final Word
It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
When you consider that Arcus Biosciences' 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. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Plus, you should also learn about these 3 warning signs we've spotted with Arcus Biosciences.
It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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