What argenx SE's (EBR:ARGX) 25% Share Price Gain Is Not Telling You

argenx SE (EBR:ARGX) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Looking further back, the 24% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, argenx may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 15.7x, when you consider almost half of the companies in the Biotechs industry in Belgium have P/S ratios under 8.6x and even P/S lower than 3x aren't out of the ordinary. 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.

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Check out our latest analysis for argenx

What Does argenx's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, argenx has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on argenx.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 82% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 32% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 56% each year growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that argenx's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From argenx's P/S?

The strong share price surge has lead to argenx's P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've concluded that argenx currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

It is also worth noting that we have found 1 warning sign for argenx that you need to take into consideration.

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