Alnylam Pharmaceuticals, Inc.'s (NASDAQ:ALNY) price-to-sales (or "P/S") ratio of 16.1x might make it look like a sell right now compared to the Biotechs industry in the United States, where around half of the companies have P/S ratios below 12.7x and even P/S below 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How Alnylam Pharmaceuticals Has Been Performing

Recent times have been advantageous for Alnylam Pharmaceuticals as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Alnylam Pharmaceuticals' is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 89% gain to the company's top line. Pleasingly, revenue has also lifted 241% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 17% per year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 147% per year growth forecast for the broader industry.

With this information, we find it concerning that Alnylam Pharmaceuticals is trading at a P/S higher than the industry. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Alnylam Pharmaceuticals' 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.

We've concluded that Alnylam Pharmaceuticals 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Alnylam Pharmaceuticals (1 shouldn't be ignored) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.