Revenues Tell The Story For Oxford Nanopore Technologies plc (LON:ONT) As Its Stock Soars 30%

Oxford Nanopore Technologies plc (LON:ONT) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. But the last month did very little to improve the 56% share price decline over the last year.

After such a large jump in price, Oxford Nanopore Technologies' price-to-sales (or "P/S") ratio of 6.2x might make it look like a sell right now compared to the wider Life Sciences industry in the United Kingdom, where around half of the companies have P/S ratios below 4.8x and even P/S below 2x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Oxford Nanopore Technologies

What Does Oxford Nanopore Technologies' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Oxford Nanopore Technologies' revenue has gone into reverse gear, which is not great. 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.

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

Is There Enough Revenue Growth Forecasted For Oxford Nanopore Technologies?

In order to justify its P/S ratio, Oxford Nanopore Technologies would need to produce impressive growth in excess of the industry.

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 15%. Still, the latest three year period has seen an excellent 49% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 22% per annum during the coming three years according to the nine analysts following the company. That's shaping up to be materially higher than the 10% per annum growth forecast for the broader industry.

With this information, we can see why Oxford Nanopore Technologies is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Oxford Nanopore Technologies shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

As we suspected, our examination of Oxford Nanopore Technologies' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Oxford Nanopore Technologies that you need to be mindful of.

If you're unsure about the strength of Oxford Nanopore Technologies' 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com