Some Confidence Is Lacking In EyePoint Pharmaceuticals, Inc. (NASDAQ:EYPT) As Shares Slide 27%

Unfortunately for some shareholders, the EyePoint Pharmaceuticals, Inc. (NASDAQ:EYPT) share price has dived 27% in the last thirty days, prolonging recent pain. Looking at the bigger picture, even after this poor month the stock is up 26% in the last year.

Even after such a large drop in price, given around half the companies in the United States' Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 2.7x, you may still consider EyePoint Pharmaceuticals as a stock to avoid entirely with its 9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for EyePoint Pharmaceuticals

How Has EyePoint Pharmaceuticals Performed Recently?

With revenue growth that's superior to most other companies of late, EyePoint Pharmaceuticals has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. 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 EyePoint Pharmaceuticals.

Is There Enough Revenue Growth Forecasted For EyePoint Pharmaceuticals?

In order to justify its P/S ratio, EyePoint Pharmaceuticals would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 26%. The strong recent performance means it was also able to grow revenue by 46% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 21% per year during the coming three years according to the ten analysts following the company. That's not great when the rest of the industry is expected to grow by 17% per year.

With this in mind, we find it intriguing that EyePoint Pharmaceuticals' P/S is closely matching its industry peers. 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. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Final Word

EyePoint 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.

For a company with revenues that are set to decline in the context of a growing industry, EyePoint Pharmaceuticals' P/S is much higher than we would've anticipated. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. At these price levels, investors should remain cautious, particularly if things don't improve.

Having said that, be aware EyePoint Pharmaceuticals is showing 3 warning signs in our investment analysis, and 1 of those is concerning.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com