Sutro Biopharma, Inc.'s (NASDAQ:STRO) Price Is Right But Growth Is Lacking After Shares Rocket 46%

Sutro Biopharma, Inc. (NASDAQ:STRO) shareholders would be excited to see that the share price has had a great month, posting a 46% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 37% over that time.

Although its price has surged higher, Sutro Biopharma's 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 Biotechs industry in the United States, where around half of the companies have P/S ratios above 11.9x and even P/S above 82x 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 so limited.

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What Does Sutro Biopharma's P/S Mean For Shareholders?

Sutro Biopharma 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. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

Sutro Biopharma's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 34%. Even so, admirably revenue has lifted 51% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue growth is heading into negative territory, declining 34% per year over the next three years. That's not great when the rest of the industry is expected to grow by 118% per annum.

With this in consideration, we find it intriguing that Sutro Biopharma's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Sutro Biopharma's P/S

Even after such a strong price move, Sutro Biopharma's P/S still trails the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It's clear to see that Sutro Biopharma maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

It is also worth noting that we have found 5 warning signs for Sutro Biopharma (1 is a bit unpleasant!) that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.