Recursion Pharmaceuticals, Inc.'s (NASDAQ:RXRX) 45% Price Boost Is Out Of Tune With Revenues

Recursion Pharmaceuticals, Inc. (NASDAQ:RXRX) shareholders are no doubt pleased to see that the share price has bounced 45% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.

Following the firm bounce in price, Recursion Pharmaceuticals may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 34.8x, when you consider almost half of the companies in the Biotechs industry in the United States have P/S ratios under 11x and even P/S lower than 3x 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 Recursion Pharmaceuticals

What Does Recursion Pharmaceuticals' P/S Mean For Shareholders?

Recursion Pharmaceuticals certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Recursion Pharmaceuticals?

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

Taking a look back first, we see that the company grew revenue by an impressive 65% last year. This great performance means it was also able to deliver immense revenue growth over the last three years. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 1.7% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 219% per annum, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Recursion Pharmaceuticals' P/S is outpacing 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Recursion Pharmaceuticals' P/S

Recursion Pharmaceuticals' 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.

We've concluded that Recursion Pharmaceuticals currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

Plus, you should also learn about these 4 warning signs we've spotted with Recursion Pharmaceuticals (including 1 which makes us a bit uncomfortable).

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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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.