To the annoyance of some shareholders, EyePoint Pharmaceuticals, Inc. (NASDAQ:EYPT) shares are down a considerable 45% in the last month, which continues a horrid run for the company. Looking at the bigger picture, even after this poor month the stock is up 73% in the last year.
Although its price has dipped substantially, EyePoint Pharmaceuticals may still be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 12.7x, since almost half of all companies in the Pharmaceuticals industry in the United States have P/S ratios under 3x and even P/S lower than 0.9x 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.
What Does EyePoint Pharmaceuticals' Recent Performance Look Like?
EyePoint Pharmaceuticals could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.
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Do Revenue Forecasts Match The High P/S Ratio?
In order to justify its P/S ratio, EyePoint Pharmaceuticals 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 worthy increase of 11%. The latest three year period has also seen an excellent 34% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 41% per annum as estimated by the ten analysts watching the company. That's not great when the rest of the industry is expected to grow by 20% per year.
With this in mind, we find it intriguing that EyePoint Pharmaceuticals' P/S is closely matching its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.
What We Can Learn From EyePoint Pharmaceuticals' P/S?
A significant share price dive has done very little to deflate EyePoint Pharmaceuticals' very lofty P/S. 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.
For a company with revenues that are set to decline in the context of a growing industry, EyePoint Pharmaceuticals' P/S is much higher than we would've anticipated. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Before you take the next step, you should know about the 4 warning signs for EyePoint Pharmaceuticals (2 make us uncomfortable!) that we have uncovered.
If these risks are making you reconsider your opinion on EyePoint Pharmaceuticals, explore our interactive list of high quality stocks to get an idea of what else is out there.
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