MacroGenics, Inc. (NASDAQ:MGNX) Surges 27% Yet Its Low P/S Is No Reason For Excitement

Despite an already strong run, MacroGenics, Inc. (NASDAQ:MGNX) shares have been powering on, with a gain of 27% in the last thirty days. The annual gain comes to 177% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, MacroGenics may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 8.8x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 15.6x and even P/S higher than 73x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for MacroGenics

How MacroGenics Has Been Performing

MacroGenics could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on MacroGenics.

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

The only time you'd be truly comfortable seeing a P/S as low as MacroGenics' is when the company's growth is on track to lag the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 30%. Pleasingly, revenue has also lifted 57% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 8.9% per year during the coming three years according to the eight analysts following the company. That's not great when the rest of the industry is expected to grow by 296% per year.

With this information, we are not surprised that MacroGenics is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On MacroGenics' P/S

Despite MacroGenics' share price climbing recently, its P/S still lags most other companies. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that MacroGenics' P/S is on the lower end of the spectrum. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for MacroGenics that 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.