Why Investors Shouldn't Be Surprised By Sutro Biopharma, Inc.'s (NASDAQ:STRO) 26% Share Price Plunge

Unfortunately for some shareholders, the Sutro Biopharma, Inc. (NASDAQ:STRO) share price has dived 26% in the last thirty days, prolonging recent pain. Longer-term shareholders would now have taken a real hit with the stock declining 3.6% in the last year.

Following the heavy fall in price, Sutro Biopharma's price-to-sales (or "P/S") ratio of 1.4x might make it look like a strong buy right now compared to the wider Biotechs industry in the United States, where around half of the companies have P/S ratios above 10.3x and even P/S above 64x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

View our latest analysis for Sutro Biopharma

What Does Sutro Biopharma's Recent Performance Look Like?

Sutro Biopharma could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

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

The only time you'd be truly comfortable seeing a P/S as depressed as Sutro Biopharma's is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered an exceptional 231% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 170% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 9.7% each year as estimated by the eleven analysts watching the company. Meanwhile, the broader industry is forecast to expand by 122% per annum, which paints a poor picture.

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 Final Word

Sutro Biopharma's P/S looks about as weak as its stock price lately. 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.

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. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Sutro Biopharma (1 is a bit unpleasant) you should be aware of.

If you're unsure about the strength of Sutro Biopharma's 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.