The Neuronetics, Inc. (NASDAQ:STIM) share price has done very well over the last month, posting an excellent gain of 59%.    But the last month did very little to improve the 65% share price decline over the last year.  

In spite of the firm bounce in price, Neuronetics' price-to-sales (or "P/S") ratio of 0.9x might still make it look like a strong buy right now compared to the wider Medical Equipment industry in the United States, where around half of the companies have P/S ratios above 3.1x and even P/S above 8x are quite common.   However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.  

Check out our latest analysis for Neuronetics

NasdaqGM:STIM Price to Sales Ratio vs Industry December 18th 2023

How Neuronetics Has Been Performing

Neuronetics certainly has been doing a good job lately as it's been growing revenue more than most other companies.   Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed.  If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.    

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Neuronetics.

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

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

If we review the last year of revenue growth, the company posted a worthy increase of 12%.   Pleasingly, revenue has also lifted 36% in aggregate from three years ago, partly thanks to the last 12 months of growth.  So we can start by confirming that the company has done a great job of growing revenues over that time.  

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 14% each year over the next three years.  With the industry only predicted to deliver 9.7% each year, the company is positioned for a stronger revenue result.

With this information, we find it odd that Neuronetics is trading at a P/S lower than the industry.  Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.  

The Bottom Line On Neuronetics' P/S

Shares in Neuronetics have risen appreciably however, its P/S is still subdued.      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.

To us, it seems Neuronetics currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry.  There could be some major risk factors that are placing downward pressure on the P/S ratio.  At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.    

We don't want to rain on the parade too much, but we did also find 5 warning signs for Neuronetics (1 can't be ignored!) that you need to be mindful of.  

If you're unsure about the strength of Neuronetics' 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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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.