Optimistic Investors Push Wave Life Sciences Ltd. (NASDAQ:WVE) Shares Up 95% But Growth Is Lacking

Despite an already strong run, Wave Life Sciences Ltd. (NASDAQ:WVE) shares have been powering on, with a gain of 95% in the last thirty days. The annual gain comes to 213% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Wave Life Sciences' price-to-sales (or "P/S") ratio of 22.6x might make it look like a strong sell right now compared to other companies in the Pharmaceuticals industry in the United States, where around half of the companies have P/S ratios below 3x and even P/S below 0.8x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Wave Life Sciences

What Does Wave Life Sciences' P/S Mean For Shareholders?

Wave Life Sciences certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

How Is Wave Life Sciences' Revenue Growth Trending?

In order to justify its P/S ratio, Wave Life Sciences would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 202%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 16% each year over the next three years. That's shaping up to be materially lower than the 19% per year growth forecast for the broader industry.

With this information, we find it concerning that Wave Life Sciences is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Wave Life Sciences' P/S

Shares in Wave Life Sciences have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

It comes as a surprise to see Wave Life Sciences trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Wave Life Sciences you should be aware of, and 2 of them are significant.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.