Benign Growth For Sutro Biopharma, Inc. (NASDAQ:STRO) Underpins Stock's 36% Plummet

Unfortunately for some shareholders, the Sutro Biopharma, Inc. (NASDAQ:STRO) share price has dived 36% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 86% share price decline.

Following the heavy fall in price, Sutro Biopharma may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.7x, considering almost half of all companies in the Biotechs industry in the United States have P/S ratios greater than 8.8x and even P/S higher than 51x aren't out of the ordinary. 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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See our latest analysis for Sutro Biopharma

What Does Sutro Biopharma's Recent Performance Look Like?

Sutro Biopharma hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Sutro Biopharma will help you uncover what's on the horizon.

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

In order to justify its P/S ratio, Sutro Biopharma would need to produce anemic growth that's substantially trailing 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 60%. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. 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 bring diminished returns, with revenue decreasing 10% per annum as estimated by the eleven analysts watching the company. That's not great when the rest of the industry is expected to grow by 173% each year.

In light of this, it's understandable that Sutro Biopharma's P/S would sit below the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Sutro Biopharma's P/S?

Shares in Sutro Biopharma have plummeted and its P/S has followed suit. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It's clear to see that Sutro Biopharma maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. 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 (at least 1 which makes us a bit uncomfortable), 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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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.