Why Investors Shouldn't Be Surprised By Aadi Bioscience, Inc.'s (NASDAQ:AADI) 48% Share Price Plunge

The Aadi Bioscience, Inc. (NASDAQ:AADI) share price has fared very poorly over the last month, falling by a substantial 48%. For any long-term shareholders, the last month ends a year to forget by locking in a 81% share price decline.

After such a large drop in price, Aadi Bioscience may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 2.5x, considering almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 11.6x and even P/S higher than 49x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

See our latest analysis for Aadi Bioscience

What Does Aadi Bioscience's Recent Performance Look Like?

Aadi Bioscience certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Aadi Bioscience would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 112% last year. Pleasingly, revenue has also lifted 59% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 48% per year over the next three years. That's shaping up to be materially lower than the 221% per annum growth forecast for the broader industry.

In light of this, it's understandable that Aadi Bioscience's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Aadi Bioscience's P/S

Having almost fallen off a cliff, Aadi Bioscience's share price has pulled its P/S way down as well. 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.

As expected, our analysis of Aadi Bioscience's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

Before you settle on your opinion, we've discovered 3 warning signs for Aadi Bioscience (1 doesn't sit too well with us!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.