The Price Is Right For Avadel Pharmaceuticals plc (NASDAQ:AVDL) Even After Diving 26%

Unfortunately for some shareholders, the Avadel Pharmaceuticals plc (NASDAQ:AVDL) share price has dived 26% in the last thirty days, prolonging recent pain. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

In spite of the heavy fall in price, given around half the companies in the United States' Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 2.8x, you may still consider Avadel Pharmaceuticals as a stock to avoid entirely with its 5.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Avadel Pharmaceuticals

How Has Avadel Pharmaceuticals Performed Recently?

With revenue growth that's superior to most other companies of late, Avadel Pharmaceuticals has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

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?

Avadel Pharmaceuticals' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. Although, its longer-term performance hasn't been anywhere near as strong with three-year revenue growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, revenue is anticipated to climb by 42% each year during the coming three years according to the nine analysts following the company. With the industry only predicted to deliver 23% per annum, the company is positioned for a stronger revenue result.

With this information, we can see why Avadel Pharmaceuticals is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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

Avadel Pharmaceuticals' shares may have suffered, but its P/S remains high. 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.

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 the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 2 warning signs for Avadel Pharmaceuticals 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.