Revenues Not Telling The Story For Gossamer Bio, Inc. (NASDAQ:GOSS) After Shares Rise 26%

Despite an already strong run, Gossamer Bio, Inc. (NASDAQ:GOSS) shares have been powering on, with a gain of 26% in the last thirty days. The annual gain comes to 144% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Gossamer Bio may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 12.3x, since almost half of all companies in the Biotechs in the United States have P/S ratios under 8.8x and even P/S lower than 3x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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See our latest analysis for Gossamer Bio

What Does Gossamer Bio's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Gossamer Bio's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as high as Gossamer Bio's is when the company's growth is on track to outshine the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 58%. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 63% per annum as estimated by the nine analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 113% per year, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Gossamer Bio's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

Gossamer Bio shares have taken a big step in a northerly direction, but its P/S is elevated as a result. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Gossamer Bio, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

Plus, you should also learn about these 3 warning signs we've spotted with Gossamer Bio (including 1 which is concerning).

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.