The Price Is Right For Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) Even After Diving 49%

To the annoyance of some shareholders, Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) shares are down a considerable 49% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 72% share price decline.

In spite of the heavy fall in price, you could still be forgiven for thinking Verrica Pharmaceuticals is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.4x, considering almost half the companies in the United States' Pharmaceuticals industry have P/S ratios below 2.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Verrica Pharmaceuticals

What Does Verrica Pharmaceuticals' Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Verrica Pharmaceuticals has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Verrica Pharmaceuticals' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Verrica Pharmaceuticals?

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

If we review the last year of revenue growth, the company posted a terrific increase of 62%. The latest three year period has also seen a 16% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 134% each year over the next three years. That's shaping up to be materially higher than the 17% per year growth forecast for the broader industry.

In light of this, it's understandable that Verrica Pharmaceuticals' 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.

The Key Takeaway

There's still some elevation in Verrica Pharmaceuticals' P/S, even if the same can't be said for its share price recently. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Verrica Pharmaceuticals maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Pharmaceuticals industry, as expected. 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.

Before you take the next step, you should know about the 5 warning signs for Verrica Pharmaceuticals (2 can't be ignored!) that we have uncovered.

If these risks are making you reconsider your opinion on Verrica Pharmaceuticals, 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.