Market Participants Recognise Schrödinger, Inc.'s (NASDAQ:SDGR) Revenues Pushing Shares 26% Higher

Schrödinger, Inc. (NASDAQ:SDGR) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 26% over that time.

Since its price has surged higher, you could be forgiven for thinking Schrödinger is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.1x, considering almost half the companies in the United States' Healthcare Services industry have P/S ratios below 2.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Schrödinger

What Does Schrödinger's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Schrödinger has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

What Are Revenue Growth Metrics Telling Us About The High P/S?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Schrödinger's to be considered reasonable.

Retrospectively, the last year delivered a decent 3.5% gain to the company's revenues. The latest three year period has also seen an excellent 66% overall rise in revenue, aided somewhat 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 17% each year during the coming three years according to the eleven analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 11% each year, which is noticeably less attractive.

With this information, we can see why Schrödinger 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

Schrödinger's P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Schrödinger maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Healthcare Services industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Schrödinger.

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