Why Investors Shouldn't Be Surprised By Nektar Therapeutics' (NASDAQ:NKTR) 27% Share Price Plunge

Nektar Therapeutics (NASDAQ:NKTR) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 101% in the last twelve months.

Following the heavy fall in price, Nektar Therapeutics' price-to-sales (or "P/S") ratio of 2x might make it look like a buy right now compared to the Pharmaceuticals industry in the United States, where around half of the companies have P/S ratios above 2.8x and even P/S above 13x are quite common. 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 Nektar Therapeutics

What Does Nektar Therapeutics' Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Nektar Therapeutics has been relatively sluggish. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could 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 Nektar Therapeutics will help you uncover what's on the horizon.

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

In order to justify its P/S ratio, Nektar Therapeutics would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.5% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 7.2% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 5.8% each year over the next three years. With the industry predicted to deliver 20% growth per annum, the company is positioned for a weaker revenue result.

In light of this, it's understandable that Nektar Therapeutics' P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Nektar Therapeutics' recently weak share price has pulled its P/S back below other Pharmaceuticals companies. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Nektar Therapeutics' analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 2 warning signs for Nektar Therapeutics (1 is a bit unpleasant!) that we have uncovered.

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.