Veracyte, Inc. (NASDAQ:VCYT) Looks Inexpensive After Falling 26% But Perhaps Not Attractive Enough

Veracyte, Inc. (NASDAQ:VCYT) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Looking at the bigger picture, even after this poor month the stock is up 46% in the last year.

In spite of the heavy fall in price, Veracyte's price-to-sales (or "P/S") ratio of 5.9x might still make it look like a buy right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios above 9x and even P/S above 49x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Veracyte

How Has Veracyte Performed Recently?

Veracyte could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

Is There Any Revenue Growth Forecasted For Veracyte?

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

If we review the last year of revenue growth, the company posted a terrific increase of 23%. Pleasingly, revenue has also lifted 103% in aggregate from three years ago, thanks to the last 12 months of growth. 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 generate growth of 10.0% each year as estimated by the ten analysts watching the company. With the industry predicted to deliver 128% growth per year, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Veracyte's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Veracyte's recently weak share price has pulled its P/S back below other Biotechs companies. 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 expected, our analysis of Veracyte's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Veracyte has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Veracyte'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.