American Well Corporation's (NYSE:AMWL) Share Price Not Quite Adding Up

There wouldn't be many who think American Well Corporation's (NYSE:AMWL) price-to-sales (or "P/S") ratio of 1.6x is worth a mention when the median P/S for the Healthcare Services industry in the United States is similar at about 2.1x. 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.

View our latest analysis for American Well

How Has American Well Performed Recently?

American Well could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

How Is American Well's Revenue Growth Trending?

In order to justify its P/S ratio, American Well would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 1.1% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 16% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 7.0% per year during the coming three years according to the twelve analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 13% each year, which is noticeably more attractive.

In light of this, it's curious that American Well's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

When you consider that American Well's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

It is also worth noting that we have found 4 warning signs for American Well that you need to take into consideration.

If these risks are making you reconsider your opinion on American Well, 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.