Market Cool On Evoke Pharma, Inc.'s (NASDAQ:EVOK) Revenues Pushing Shares 29% Lower

Evoke Pharma, Inc. (NASDAQ:EVOK) shareholders won't be pleased to see that the share price has had a very rough month, dropping 29% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 49% in that time.

Since its price has dipped substantially, Evoke Pharma may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.8x, since almost half of all companies in the Pharmaceuticals industry in the United States have P/S ratios greater than 2.9x and even P/S higher than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

Check out our latest analysis for Evoke Pharma

What Does Evoke Pharma's P/S Mean For Shareholders?

Recent times have been advantageous for Evoke Pharma as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. 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 out of favour.

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

Is There Any Revenue Growth Forecasted For Evoke Pharma?

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

If we review the last year of revenue growth, the company posted a terrific increase of 98%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 51% each year during the coming three years according to the one analyst following the company. Meanwhile, the rest of the industry is forecast to only expand by 17% per year, which is noticeably less attractive.

In light of this, it's peculiar that Evoke Pharma's P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From Evoke Pharma's P/S?

Shares in Evoke Pharma have plummeted and its P/S has followed suit. 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.

Evoke Pharma's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

Having said that, be aware Evoke Pharma is showing 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored.

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