Alector, Inc. (NASDAQ:ALEC) shares have retraced a considerable 27% in the last month, reversing a fair amount of their solid recent performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 31% in that time.
Following the heavy fall in price, Alector may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 5.7x, since almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 12.9x and even P/S higher than 50x 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 limited.
See our latest analysis for Alector
How Has Alector Performed Recently?
Alector could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
What Are Revenue Growth Metrics Telling Us About The Low P/S?
The only time you'd be truly comfortable seeing a P/S as depressed as Alector's is when the company's growth is on track to lag the industry decidedly.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 28%. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.
Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 14% each year over the next three years. That's shaping up to be materially lower than the 238% per year growth forecast for the broader industry.
With this in consideration, its clear as to why Alector's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
What Does Alector's P/S Mean For Investors?
Having almost fallen off a cliff, Alector's share price has pulled its P/S way down 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.
As we suspected, our examination of Alector's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.
It is also worth noting that we have found 4 warning signs for Alector that you need to take into consideration.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.
