The Market Doesn't Like What It Sees From Sutro Biopharma, Inc.'s (NASDAQ:STRO) Revenues Yet

With a price-to-sales (or "P/S") ratio of 2x Sutro Biopharma, Inc. (NASDAQ:STRO) may be sending very bullish signals at the moment, given that almost half of all the Biotechs companies in the United States have P/S ratios greater than 15x and even P/S higher than 75x are not unusual. 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 Sutro Biopharma

How Has Sutro Biopharma Performed Recently?

Sutro Biopharma could be doing better as it's been growing revenue less than most other companies lately. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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

Do Revenue Forecasts Match The Low P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 127% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 260% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 14% each year as estimated by the nine analysts watching the company. That's not great when the rest of the industry is expected to grow by 167% per annum.

In light of this, it's understandable that Sutro Biopharma's P/S would sit below the majority of other companies. 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 Key Takeaway

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 Sutro Biopharma's P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, Sutro Biopharma's 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Sutro Biopharma that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.