Why Investors Shouldn't Be Surprised By NeuroPace, Inc.'s (NASDAQ:NPCE) 58% Share Price Surge

Despite an already strong run, NeuroPace, Inc. (NASDAQ:NPCE) shares have been powering on, with a gain of 58% in the last thirty days. This latest share price bounce rounds out a remarkable 328% gain over the last twelve months.

After such a large jump in price, when almost half of the companies in the United States' Medical Equipment industry have price-to-sales ratios (or "P/S") below 3.3x, you may consider NeuroPace as a stock not worth researching with its 6.2x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for NeuroPace

What Does NeuroPace's Recent Performance Look Like?

NeuroPace certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

NeuroPace's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 38% gain to the company's top line. The latest three year period has also seen an excellent 46% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 24% each year during the coming three years according to the six analysts following the company. That's shaping up to be materially higher than the 9.8% per year growth forecast for the broader industry.

With this in mind, it's not hard to understand why NeuroPace's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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

NeuroPace's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 NeuroPace maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Medical Equipment industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for NeuroPace that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.