Wave Life Sciences Ltd.'s (NASDAQ:WVE) 42% Price Boost Is Out Of Tune With Revenues
Wave Life Sciences Ltd. (NASDAQ:WVE) shares have had a really impressive month, gaining 42% after a shaky period beforehand. The annual gain comes to 110% following the latest surge, making investors sit up and take notice.
Following the firm bounce in price, when almost half of the companies in the United States' Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 2.9x, you may consider Wave Life Sciences as a stock not worth researching with its 13.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.
View our latest analysis for Wave Life Sciences
How Wave Life Sciences Has Been Performing
Wave Life Sciences could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Keen to find out how analysts think Wave Life Sciences' future stacks up against the industry? In that case, our free report is a great place to start.
Do Revenue Forecasts Match The High P/S Ratio?
The only time you'd be truly comfortable seeing a P/S as steep as Wave Life Sciences' is when the company's growth is on track to outshine the industry decidedly.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 9.3%. Even so, admirably revenue has lifted 192% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.
Looking ahead now, revenue is anticipated to climb by 53% per annum during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 59% each year, which is not materially different.
In light of this, it's curious that Wave Life Sciences' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.
The Bottom Line On Wave Life Sciences' P/S
Wave Life Sciences' P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
Given Wave Life Sciences' future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. A positive change is needed in order to justify the current price-to-sales ratio.
You should always think about risks. Case in point, we've spotted 4 warning signs for Wave Life Sciences you should be aware of, and 1 of them is potentially serious.
If you're unsure about the strength of Wave Life Sciences' 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.
