Allergy Therapeutics plc (LON:AGY) Soars 27% But It's A Story Of Risk Vs Reward

Allergy Therapeutics plc (LON:AGY) shares have had a really impressive month, gaining 27% after a shaky period beforehand. The last month tops off a massive increase of 272% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Allergy Therapeutics' price-to-sales (or "P/S") ratio of 4.7x right now seems quite "middle-of-the-road" compared to the Pharmaceuticals industry in the United Kingdom, where the median P/S ratio is around 4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Allergy Therapeutics

How Has Allergy Therapeutics Performed Recently?

While the industry has experienced revenue growth lately, Allergy Therapeutics' 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

Keen to find out how analysts think Allergy Therapeutics' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For Allergy Therapeutics?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Allergy Therapeutics' to be considered reasonable.

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 7.4%. This means it has also seen a slide in revenue over the longer-term as revenue is down 35% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 17% as estimated by the lone analyst watching the company. With the industry only predicted to deliver 8.6%, the company is positioned for a stronger revenue result.

With this information, we find it interesting that Allergy Therapeutics is trading at a fairly similar P/S compared to the industry. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

Allergy Therapeutics' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

We've established that Allergy Therapeutics currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

It is also worth noting that we have found 3 warning signs for Allergy Therapeutics (1 shouldn't be ignored!) that you need to take into consideration.

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.

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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.