Arcutis Biotherapeutics, Inc.'s (NASDAQ:ARQT) Popularity With Investors Is Under Threat From Overpricing

There wouldn't be many who think Arcutis Biotherapeutics, Inc.'s (NASDAQ:ARQT) price-to-sales (or "P/S") ratio of 9x is worth a mention when the median P/S for the Biotechs industry in the United States is similar at about 11.2x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Arcutis Biotherapeutics

How Arcutis Biotherapeutics Has Been Performing

Arcutis Biotherapeutics 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 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 not quite in favour.

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

How Is Arcutis Biotherapeutics' Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Arcutis Biotherapeutics' is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. In spite of this unbelievable short-term growth, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 61% each year as estimated by the seven analysts watching the company. That's shaping up to be materially lower than the 200% per year growth forecast for the broader industry.

In light of this, it's curious that Arcutis Biotherapeutics' 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. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

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.

When you consider that Arcutis Biotherapeutics' 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.

Before you settle on your opinion, we've discovered 3 warning signs for Arcutis Biotherapeutics (1 is significant!) that you should be aware of.

If these risks are making you reconsider your opinion on Arcutis Biotherapeutics, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com