Xencor, Inc.'s (NASDAQ:XNCR) 26% Share Price Surge Not Quite Adding Up

Despite an already strong run, Xencor, Inc. (NASDAQ:XNCR) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 40%.

Following the firm bounce in price, Xencor may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 22.1x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios under 10.6x and even P/S lower than 4x are not unusual. 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 Xencor

How Xencor Has Been Performing

Xencor could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Xencor's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 41% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 48% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue should grow by 36% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 122% each year, which is noticeably more attractive.

In light of this, it's alarming that Xencor's P/S sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Xencor's P/S

The strong share price surge has lead to Xencor's P/S soaring as well. 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 Xencor 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Xencor you should know about.

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