Protagonist Therapeutics, Inc.'s (NASDAQ:PTGX) 51% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Protagonist Therapeutics, Inc. (NASDAQ:PTGX) shares have been powering on, with a gain of 51% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 93% in the last year.

After such a large jump in price, Protagonist Therapeutics' price-to-sales (or "P/S") ratio of 25.9x might make it look like a strong sell right now compared to other companies in the Biotechs industry in the United States, where around half of the companies have P/S ratios below 10.1x and even P/S below 3x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out our latest analysis for Protagonist Therapeutics

What Does Protagonist Therapeutics' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Protagonist Therapeutics' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Protagonist Therapeutics' to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 34%. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. Accordingly, shareholders will be pleased, but also have some serious questions to ponder about the last 12 months.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 1.3% per annum as estimated by the twelve analysts watching the company. Meanwhile, the broader industry is forecast to expand by 129% per year, which paints a poor picture.

With this in mind, we find it intriguing that Protagonist Therapeutics' P/S is closely matching its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.

What Does Protagonist Therapeutics' P/S Mean For Investors?

Protagonist Therapeutics' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our examination of Protagonist Therapeutics' analyst forecasts revealed that its shrinking revenue outlook isn't drawing down its high P/S anywhere near as much as we would have predicted. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. Unless these conditions improve markedly, it'll be a challenging time for shareholders.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Protagonist Therapeutics, and understanding these should be part of your investment process.

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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.