Sutro Biopharma, Inc. (NASDAQ:STRO) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 30% share price drop.

After such a large drop in price, Sutro Biopharma's price-to-sales (or "P/S") ratio of 4.1x might 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 15.2x and even P/S above 71x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

How Sutro Biopharma Has Been Performing

Sutro Biopharma could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. 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.

How Is Sutro Biopharma's Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Sutro Biopharma's to be considered reasonable.

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 30%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 6.3% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 29% per annum as estimated by the ten analysts watching the company. That's shaping up to be materially lower than the 152% per annum growth forecast for the broader industry.

With this in consideration, its clear as to why Sutro Biopharma's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

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

Shares in Sutro Biopharma have plummeted and its P/S has followed suit. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Sutro Biopharma's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Sutro Biopharma, and understanding them should be part of your investment process.

If you're unsure about the strength of Sutro Biopharma'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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