To the annoyance of some shareholders, Alpha Teknova, Inc. (NASDAQ:TKNO) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Looking at the bigger picture, even after this poor month the stock is up 81% in the last year.
In spite of the heavy fall in price, you could still be forgiven for thinking Alpha Teknova is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.7x, considering almost half the companies in the United States' Life Sciences industry have P/S ratios below 3.5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.
Check out our latest analysis for Alpha Teknova
How Alpha Teknova Has Been Performing
There hasn't been much to differentiate Alpha Teknova's and the industry's revenue growth lately. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. However, if this isn't the case, investors might get caught out paying too much for the stock.
Keen to find out how analysts think Alpha Teknova's future stacks up against the industry? In that case, our free report is a great place to start.How Is Alpha Teknova's Revenue Growth Trending?
In order to justify its P/S ratio, Alpha Teknova would need to produce outstanding growth that's well in excess of the industry.
Retrospectively, the last year delivered a decent 3.8% gain to the company's revenues. Still, lamentably revenue has fallen 1.8% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
Looking ahead now, revenue is anticipated to climb by 14% per annum during the coming three years according to the five analysts following the company. That's shaping up to be materially higher than the 7.2% per annum growth forecast for the broader industry.
In light of this, it's understandable that Alpha Teknova's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What Does Alpha Teknova's P/S Mean For Investors?
A significant share price dive has done very little to deflate Alpha Teknova's very lofty P/S. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
As we suspected, our examination of Alpha Teknova's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.
Plus, you should also learn about this 1 warning sign we've spotted with Alpha Teknova.
If these risks are making you reconsider your opinion on Alpha Teknova, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.