Stoke Therapeutics, Inc.'s (NASDAQ:STOK) Shares Bounce 36% But Its Business Still Trails The Industry

Despite an already strong run, Stoke Therapeutics, Inc. (NASDAQ:STOK) shares have been powering on, with a gain of 36% in the last thirty days. The last month tops off a massive increase of 134% in the last year.

In spite of the firm bounce in price, Stoke Therapeutics may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 8.6x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 12.1x and even P/S higher than 101x are not unusual. 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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View 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 the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

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

In order to justify its P/S ratio, Stoke Therapeutics would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible 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 slump, contracting by 32% per year during the coming three years according to the ten analysts following the company. That's not great when the rest of the industry is expected to grow by 128% each year.

With this in consideration, we find it intriguing that Stoke Therapeutics' P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Stoke Therapeutics' P/S

The latest share price surge wasn't enough to lift Stoke Therapeutics' P/S close to the industry median. 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.

As we suspected, our examination of Stoke Therapeutics' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Stoke Therapeutics is showing 1 warning sign in our investment analysis, you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.