CareDx, Inc's (NASDAQ:CDNA) Share Price Boosted 40% But Its Business Prospects Need A Lift Too

CareDx, Inc (NASDAQ:CDNA) shareholders would be excited to see that the share price has had a great month, posting a 40% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 34%.

Although its price has surged higher, CareDx may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 2.3x, considering almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 16x and even P/S higher than 75x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

View our latest analysis for CareDx

What Does CareDx's P/S Mean For Shareholders?

CareDx could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

How Is CareDx's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 46% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Looking ahead now, revenue is anticipated to climb by 2.8% per annum during the coming three years according to the six analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 277% per annum, which is noticeably more attractive.

With this information, we can see why CareDx is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On CareDx's P/S

CareDx's recent share price jump still sees fails to bring its P/S alongside the industry median. 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.

As we suspected, our examination of CareDx's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with CareDx.

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