Stock Analysis

Subdued Growth No Barrier To Royalty Pharma plc (NASDAQ:RPRX) With Shares Advancing 25%

NasdaqGS:RPRX
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Royalty Pharma plc (NASDAQ:RPRX) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 11% is also fairly reasonable.

Following the firm bounce in price, Royalty Pharma may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 6.3x, when you consider almost half of the companies in the Pharmaceuticals industry in the United States have P/S ratios under 3.1x and even P/S lower than 1x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Royalty Pharma

ps-multiple-vs-industry
NasdaqGS:RPRX Price to Sales Ratio vs Industry January 29th 2025

How Has Royalty Pharma Performed Recently?

Royalty Pharma hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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

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

The only time you'd be truly comfortable seeing a P/S as steep as Royalty Pharma's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 2.5% decrease to the company's top line. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 7.2% each year during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 22% per annum, which is noticeably more attractive.

In light of this, it's alarming that Royalty Pharma's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Royalty Pharma's P/S

The strong share price surge has lead to Royalty Pharma's P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Royalty Pharma, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

It is also worth noting that we have found 3 warning signs for Royalty Pharma that you need to take into consideration.

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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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.

About NasdaqGS:RPRX

Royalty Pharma

Operates as a buyer of biopharmaceutical royalties and a funder of innovations in the biopharmaceutical industry in the United States.

Undervalued with adequate balance sheet.

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