Some Confidence Is Lacking In NovoCure Limited (NASDAQ:NVCR) As Shares Slide 25%

NovoCure Limited (NASDAQ:NVCR) shares have had a horrible month, losing 25% after a relatively good period beforehand. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 17%.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about NovoCure's P/S ratio of 3.4x, since the median price-to-sales (or "P/S") ratio for the Medical Equipment industry in the United States is also close to 3.5x. 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 NovoCure

How Has NovoCure Performed Recently?

NovoCure certainly has been doing a good job lately as it's been growing revenue more than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

How Is NovoCure's Revenue Growth Trending?

NovoCure's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered an exceptional 19% gain to the company's top line. As a result, it also grew revenue by 13% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 6.8% per year during the coming three years according to the seven analysts following the company. With the industry predicted to deliver 9.3% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's curious that NovoCure's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

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

NovoCure's plummeting stock price has brought its P/S back to a similar region as 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.

Given that NovoCure's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

You always need to take note of risks, for example - NovoCure has 2 warning signs we think you should be aware of.

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