The Price Is Right For Avadel Pharmaceuticals plc (NASDAQ:AVDL) Even After Diving 27%

The Avadel Pharmaceuticals plc (NASDAQ:AVDL) share price has fared very poorly over the last month, falling by a substantial 27%. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Although its price has dipped substantially, Avadel Pharmaceuticals may still be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 7.7x, when you consider almost half of the companies in the Pharmaceuticals industry in the United States have P/S ratios under 3x and even P/S lower than 0.9x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Avadel Pharmaceuticals

What Does Avadel Pharmaceuticals' Recent Performance Look Like?

Avadel Pharmaceuticals certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Avadel Pharmaceuticals.

Is There Enough Revenue Growth Forecasted For Avadel Pharmaceuticals?

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

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. Although, its longer-term performance hasn't been anywhere near as strong with three-year revenue growth being relatively non-existent overall. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Looking ahead now, revenue is anticipated to climb by 47% per annum during the coming three years according to the eight analysts following the company. With the industry only predicted to deliver 19% each year, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Avadel Pharmaceuticals' P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Avadel Pharmaceuticals' P/S

A significant share price dive has done very little to deflate Avadel Pharmaceuticals' very lofty P/S. 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.

Our look into Avadel Pharmaceuticals shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Avadel Pharmaceuticals is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Avadel Pharmaceuticals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.