Compugen Ltd. (NASDAQ:CGEN) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month.    The good news is that in the last year, the stock has shone bright like a diamond, gaining 225%.  

After such a large drop in price, Compugen's price-to-sales (or "P/S") ratio of 5.1x might make it look like a strong buy right now compared to the wider Biotechs industry in the United States, where around half of the companies have P/S ratios above 13x and even P/S above 59x are quite common.   Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.  

NasdaqCM:CGEN Price to Sales Ratio vs Industry April 28th 2024

How Has Compugen Performed Recently?

Compugen certainly has been doing a good job lately as it's been growing revenue more than most other companies.   One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward.  If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.    

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

Is There Any Revenue Growth Forecasted For Compugen?  

In order to justify its P/S ratio, Compugen would need to produce anemic growth that's substantially trailing the industry.  

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months.   The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance.  So we can start by confirming that the company has done a tremendous job of growing revenue over that time.  

Looking ahead now, revenue is anticipated to slump, contracting by 5.2% per year during the coming three years according to the dual analysts following the company.  That's not great when the rest of the industry is expected to grow by 163% per annum.

With this in consideration, we find it intriguing that Compugen's P/S is closely matching its industry peers.  Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse.  Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.  

What Does Compugen's P/S Mean For Investors?

Having almost fallen off a cliff, Compugen's share price has pulled its P/S way down as well.      Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

It's clear to see that Compugen maintains its low P/S on the weakness of its forecast for sliding revenue, as expected.  At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio.  Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.    

We don't want to rain on the parade too much, but we did also find 4 warning signs for Compugen (1 shouldn't be ignored!) that you need to be mindful of.  

If you're unsure about the strength of Compugen'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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