The Market Is Betting Big on APLS - What's the Catch?

One of Wall Street's biggest winners of the day is Apellis Pharmaceuticals, a biotechnology company whose shares have climbed 3.1% to a price of $51.53 -- 31.11% below its average analyst target price of $74.81.

The average analyst rating for the stock is buy. APLS outperformed the S&P 500 index by 2.9% during today's afternoon session, and by 37.3% over the last year with a return of 22.5%.

Apellis Pharmaceuticals, Inc., a commercial-stage biopharmaceutical company, focuses on the discovery, development, and commercialization of therapeutic compounds through the inhibition of the complement system for autoimmune and inflammatory diseases. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.

Apellis Pharmaceuticals does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (EPS) values of $-5.34 and $-7.87. We can see that APLS has a forward P/E ratio of -9.7 and a trailing P/E ratio of -6.5.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US healthcare companies is 13.21, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Apellis Pharmaceuticals's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -0.23. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing APLS's growth potential .

To better understand the strength of Apellis Pharmaceuticals's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2021-12-31 67 598 -805.67 -844.85
2020-12-31 251 439 -85.27 n/a
2019-12-31 0 288 -inf n/a
  • Average operating margins: -inf %
  • Average operating margins growth rate: -422.4 %
  • Coefficient of variability (lower numbers indicate less volatility): nan %

Apellis Pharmaceuticals's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 -563 -1 -564 -240.08
2020-12-31 -160 -5 -166 22.05
2019-12-31 -211 -2 -213 n/a
  • Average free cash flow: $-314,322,589.00
  • Average free cash flown growth rate: -109.0 %
  • Coefficient of variability (lower numbers indicating more stability): 69.3 %

If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for APLS, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.

Apellis Pharmaceuticals's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 18, so the company's assets may be overvalued compared to the average P/B ratio of the Healthcare sector, which stands at 4.07 as of the third quarter of 2022.

With a negative P/E ratio, an elevated P/B ratio, and irregular and negative cash flows with a downwards trend, we can conclude that Apellis Pharmaceuticals is probably overvalued at current prices. The stock presents poor growth indicators because of its weak operating margins with a negative growth trend, and a PEG ratio of less than 1.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.