Ocular Therapeutix, Inc. (NASDAQ:OCUL) Stocks Shoot Up 41% But Its P/S Still Looks Reasonable

Ocular Therapeutix, Inc. (NASDAQ:OCUL) shareholders would be excited to see that the share price has had a great month, posting a 41% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 72% in the last year.

Following the firm bounce in price, Ocular Therapeutix may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 21x, since almost half of all companies in the Pharmaceuticals industry in the United States have P/S ratios under 2.9x and even P/S lower than 0.8x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Ocular Therapeutix

What Does Ocular Therapeutix's P/S Mean For Shareholders?

Ocular Therapeutix's revenue growth of late has been pretty similar to most other companies. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

In order to justify its P/S ratio, Ocular Therapeutix 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 16%. The strong recent performance means it was also able to grow revenue by 170% 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 climb by 32% per year during the coming three years according to the eight analysts following the company. That's shaping up to be materially higher than the 20% per annum growth forecast for the broader industry.

With this in mind, it's not hard to understand why Ocular Therapeutix's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has lead to Ocular Therapeutix's P/S soaring as well. 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.

As we suspected, our examination of Ocular Therapeutix's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for Ocular Therapeutix you should be aware of, and 1 of them can't be ignored.

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.

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

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