Schrödinger, Inc. (NASDAQ:SDGR) Looks Just Right With A 33% Price Jump

Schrödinger, Inc. (NASDAQ:SDGR) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 8.2% isn't as attractive.

Following the firm bounce in price, Schrödinger may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 9.3x, since almost half of all companies in the Healthcare Services industry in the United States have P/S ratios under 3x and even P/S lower than 0.8x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

We've discovered 1 warning sign about Schrödinger. View them for free.

View our latest analysis for Schrödinger

What Does Schrödinger's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Schrödinger's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

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.

Is There Enough Revenue Growth Forecasted For Schrödinger?

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

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 4.2%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 50% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 21% per year as estimated by the eight analysts watching the company. That's shaping up to be materially higher than the 11% per year growth forecast for the broader industry.

In light of this, it's understandable that Schrödinger's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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

Schrödinger's P/S has grown nicely over the last month thanks to a handy boost in the share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into Schrödinger shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Schrödinger you should be aware of.

If these risks are making you reconsider your opinion on Schrödinger, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.