Lacklustre Performance Is Driving Sangamo Therapeutics, Inc.'s (NASDAQ:SGMO) Low P/S

Sangamo Therapeutics, Inc.'s (NASDAQ:SGMO) price-to-sales (or "P/S") ratio of 0.8x might make it look like a strong buy right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios above 11.2x and even P/S above 58x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Sangamo Therapeutics

How Has Sangamo Therapeutics Performed Recently?

Recent times have been advantageous for Sangamo Therapeutics as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

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

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

Retrospectively, the last year delivered an exceptional 114% gain to the company's top line. The latest three year period has also seen an excellent 124% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue growth is heading into negative territory, declining 22% per year over the next three years. With the industry predicted to deliver 83% growth each year, that's a disappointing outcome.

With this in consideration, we find it intriguing that Sangamo Therapeutics' P/S is closely matching its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

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

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.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Sangamo Therapeutics' P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, Sangamo Therapeutics' poor outlook justifies its low P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Sangamo Therapeutics has 5 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.