PeptiDream Inc. (TSE:4587) Surges 27% Yet Its Low P/S Is No Reason For Excitement

PeptiDream Inc. (TSE:4587) shares have continued their recent momentum with a 27% gain in the last month alone. Looking further back, the 16% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, PeptiDream may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 11.5x, considering almost half of all companies in the Biotechs industry in Japan have P/S ratios greater than 14.5x and even P/S higher than 77x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for PeptiDream

How PeptiDream Has Been Performing

PeptiDream's negative revenue growth of late has neither been better nor worse than most other companies. It might be that many expect the company's revenue performance to degrade further, which has repressed the P/S. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. At the very least, you'd be hoping that revenue doesn't fall off a cliff if your plan is to pick up some stock while it's out of favour.

Want the full picture on analyst estimates for the company? Then our free report on PeptiDream will help you uncover what's on the horizon.

How Is PeptiDream's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as PeptiDream's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. Still, the latest three year period has seen an excellent 120% 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.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 16% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 32% each year, which is noticeably more attractive.

With this information, we can see why PeptiDream is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What Does PeptiDream's P/S Mean For Investors?

The latest share price surge wasn't enough to lift PeptiDream's P/S close to the industry median. 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.

As expected, our analysis of PeptiDream's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 2 warning signs for PeptiDream (1 is a bit concerning!) that you should be aware of before investing here.

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.

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