Sangamo Therapeutics, Inc. (NASDAQ:SGMO) shareholders have had their patience rewarded with a 61% share price jump in the last month. The last month tops off a massive increase of 215% in the last year.

Since its price has surged higher, Sangamo Therapeutics may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 25.3x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios under 12.7x and even P/S lower than 4x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Sangamo Therapeutics Has Been Performing

While the industry has experienced revenue growth lately, Sangamo Therapeutics' revenue has gone into reverse gear, which is not great. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Sangamo Therapeutics will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered a frustrating 94% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 91% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 114% each year during the coming three years according to the seven analysts following the company. That's shaping up to be materially lower than the 147% each year growth forecast for the broader industry.

With this information, we find it concerning that Sangamo Therapeutics 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. 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 Key Takeaway

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

We've concluded that Sangamo Therapeutics currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 4 warning signs for Sangamo Therapeutics (2 are a bit unpleasant!) that you need to take into consideration.

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