Yahoo Finance 23andMe Holding Co.'s (NASDAQ:ME) Share Price Could Signal Some Risk
When you see that almost half of the companies in the Healthcare industry in the United States have price-to-sales ratios (or "P/S") below 1.2x, 23andMe Holding Co. (NASDAQ:ME) looks to be giving off some sell signals with its 3.1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
See our latest analysis for 23andMe Holding
How Has 23andMe Holding Performed Recently?
23andMe Holding certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on 23andMe Holding.
Do Revenue Forecasts Match The High P/S Ratio?
In order to justify its P/S ratio, 23andMe Holding would need to produce impressive growth in excess of the industry.
Taking a look back first, we see that the company grew revenue by an impressive 18% last year. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Turning to the outlook, the next three years should generate growth of 7.2% per year as estimated by the four analysts watching the company. That's shaping up to be similar to the 8.7% per year growth forecast for the broader industry.
With this in consideration, we find it intriguing that 23andMe Holding's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.
What We Can Learn From 23andMe Holding's P/S?
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.
Given 23andMe Holding's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Before you take the next step, you should know about the 3 warning signs for 23andMe Holding (1 is a bit concerning!) that we have uncovered.
If you're unsure about the strength of 23andMe Holding's 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.
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