Improved Revenues Required Before Stoke Therapeutics, Inc. (NASDAQ:STOK) Stock's 49% Jump Looks Justified

Stoke Therapeutics, Inc. (NASDAQ:STOK) shares have continued their recent momentum with a 49% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 38%.

In spite of the firm bounce in price, Stoke Therapeutics may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 5.4x, considering almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 9.2x and even P/S higher than 64x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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See our latest analysis for Stoke Therapeutics

How Stoke Therapeutics Has Been Performing

With revenue growth that's superior to most other companies of late, Stoke Therapeutics has been doing relatively well. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Keen to find out how analysts think Stoke Therapeutics' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Revenue Growth Forecasted For Stoke Therapeutics?

The only time you'd be truly comfortable seeing a P/S as low as Stoke Therapeutics' is when the company's growth is on track to lag the industry.

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

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 33% per year as estimated by the eleven analysts watching the company. Meanwhile, the broader industry is forecast to expand by 115% per annum, which paints a poor picture.

With this information, we are not surprised that Stoke Therapeutics is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Stoke Therapeutics' stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of Stoke Therapeutics' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Stoke Therapeutics' poor outlook justifies its low P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Stoke Therapeutics (at least 1 which is a bit concerning), and understanding them should be part of your investment process.

If you're unsure about the strength of Stoke Therapeutics' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.