What Arrowhead Pharmaceuticals, Inc.'s (NASDAQ:ARWR) 29% Share Price Gain Is Not Telling You

Despite an already strong run, Arrowhead Pharmaceuticals, Inc. (NASDAQ:ARWR) shares have been powering on, with a gain of 29% in the last thirty days. The last month tops off a massive increase of 107% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Arrowhead Pharmaceuticals' P/S ratio of 9x, since the median price-to-sales (or "P/S") ratio for the Biotechs industry in the United States is also close to 10.3x. 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.

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See our latest analysis for Arrowhead Pharmaceuticals

What Does Arrowhead Pharmaceuticals' P/S Mean For Shareholders?

Recent times have been advantageous for Arrowhead Pharmaceuticals as its revenues have been rising faster than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Arrowhead Pharmaceuticals' to be considered reasonable.

Retrospectively, the last year delivered an explosive gain to the company's top line. The latest three year period has also seen an excellent 129% overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 11% per year as estimated by the analysts watching the company. Meanwhile, the broader industry is forecast to expand by 127% per year, which paints a poor picture.

With this information, we find it concerning that Arrowhead Pharmaceuticals is trading at a fairly similar P/S compared to the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

What Does Arrowhead Pharmaceuticals' P/S Mean For Investors?

Arrowhead Pharmaceuticals appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

While Arrowhead Pharmaceuticals' P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

You always need to take note of risks, for example - Arrowhead Pharmaceuticals has 1 warning sign we think 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.