There's Reason For Concern Over Ultragenyx Pharmaceutical Inc.'s (NASDAQ:RARE) Massive 26% Price Jump

Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 34% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Ultragenyx Pharmaceutical's P/S ratio of 9.7x, since the median price-to-sales (or "P/S") ratio for the Biotechs industry in the United States is also close to 11.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Ultragenyx Pharmaceutical

What Does Ultragenyx Pharmaceutical's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Ultragenyx Pharmaceutical has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

How Is Ultragenyx Pharmaceutical's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Ultragenyx Pharmaceutical's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 19%. The latest three year period has also seen an excellent 34% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 32% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 183% per annum, which is noticeably more attractive.

With this in mind, we find it intriguing that Ultragenyx Pharmaceutical's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From Ultragenyx Pharmaceutical's P/S?

Ultragenyx Pharmaceutical appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

When you consider that Ultragenyx Pharmaceutical's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

You always need to take note of risks, for example - Ultragenyx Pharmaceutical has 3 warning signs we think you should be aware of.

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.

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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.

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