Is It Too Late To Reassess Arrowhead Pharmaceuticals (ARWR) After A 260% One Year Rally?

• If you are asking whether Arrowhead Pharmaceuticals at US$70.81 still offers value after a strong run, this article walks through what the current price might imply.
• The stock has recent returns of 5.3% over 7 days, 15.3% over 30 days, 4.5% year to date and 260.0% over 1 year, which naturally raises questions about how risk and upside now balance out.
• Recent attention on Arrowhead Pharmaceuticals has focused on its drug development pipeline and progress within the RNAi therapeutics space. This has kept it on many investors' radar. These developments provide important context when thinking about whether the recent share price moves are aligned with the business outlook or driven more by sentiment.
• On our 6 point valuation checklist, Arrowhead Pharmaceuticals scores a 3, with 1 point added for each area where the stock screens as undervalued. We will look at how different methods like DCFs and multiples arrive at that score and then finish with an approach that can give you a fuller view of what the valuation might really mean for your portfolio.

Arrowhead Pharmaceuticals delivered 260.0% returns over the last year. See how this stacks up to the rest of the Biotechs industry.

Approach 1: Arrowhead Pharmaceuticals Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a company might be worth today by projecting its future cash flows and then discounting those cash flows back to a single present value figure.

For Arrowhead Pharmaceuticals, the model used is a 2 Stage Free Cash Flow to Equity approach. The latest twelve month free cash flow is a loss of about $83.8 million. Analyst projections and Simply Wall St extrapolations indicate free cash flow of $301.2 million in 2030, with a path that includes several years of projected cash outflows in the near term before moving into positive territory.

Based on these cash flow projections, the DCF model provides an estimated intrinsic value of about $118.87 per share. Compared with the current share price of US$70.81, this implies the stock is trading at a 40.4% discount to that intrinsic value, which the model interprets as undervalued.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Arrowhead Pharmaceuticals is undervalued by 40.4%. Track this in your watchlist or portfolio, or discover 873 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Arrowhead Pharmaceuticals.

Approach 2: Arrowhead Pharmaceuticals Price vs Sales

For companies where earnings are not yet a steady guide, price based on sales is often more useful than P/E, because it focuses on what investors are paying for each dollar of current revenue rather than current profit.

In general, higher growth potential and lower perceived risk can justify a higher P/S ratio, while slower growth or higher risk tend to point to a lower, more conservative multiple. That is why simple comparisons to headline sector averages can be misleading for a stock like Arrowhead Pharmaceuticals.

Arrowhead currently trades on a P/S ratio of 11.60x. This is slightly below the Biotechs industry average of 11.66x and below the peer group average of 15.19x. Simply Wall St’s Fair Ratio metric, which estimates a suitable P/S based on factors such as growth profile, risks, profit margins, market cap and industry, is 9.50x for Arrowhead. Because Fair Ratio is tailored to the company’s own characteristics, it can offer a more targeted benchmark than broad peer or industry averages.

Comparing the Fair Ratio of 9.50x with the current 11.60x suggests Arrowhead Pharmaceuticals is trading above that level, so on this measure the shares look overvalued.

Result: OVERVALUED

P/S ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1449 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Arrowhead Pharmaceuticals Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. This is where you set out your story for Arrowhead Pharmaceuticals, link it to your own revenue, earnings and margin assumptions, and see how that flows through to a fair value that you can compare with the current price on Simply Wall St’s Community page. Narratives update automatically when new news or earnings arrive so you can, for example, see one investor framing Arrowhead as worth US$80.00 based on strong RNAi pipelines and partnerships while another sees only US$17.00 because of clinical, commercial and cost risks, then decide which story and fair value feels closer to your own view.

Do you think there's more to the story for Arrowhead Pharmaceuticals? Head over to our Community to see what others are saying!

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com