What You Can Learn From Personalis, Inc.'s (NASDAQ:PSNL) P/S After Its 40% Share Price Crash

Personalis, Inc. (NASDAQ:PSNL) shareholders that were waiting for something to happen have been dealt a blow with a 40% share price drop in the last month. The good news is that in the last year, the stock has shone bright like a diamond, gaining 147%.

Although its price has dipped substantially, when almost half of the companies in the United States' Life Sciences industry have price-to-sales ratios (or "P/S") below 2.7x, you may still consider Personalis as a stock probably not worth researching with its 3.8x P/S ratio. 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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Check out our latest analysis for Personalis

What Does Personalis' Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Personalis has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Personalis' future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

Personalis' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 15% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 1.0% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 20% per annum over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 6.5% per annum, which is noticeably less attractive.

With this information, we can see why Personalis is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Personalis' P/S Mean For Investors?

Despite the recent share price weakness, Personalis' P/S remains higher than most other companies in the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look into Personalis shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Personalis (1 is a bit unpleasant!) that you should be aware of before investing here.

If you're unsure about the strength of Personalis' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.