It's a good question, with no exact answer. A lot defends on the net margins you think the company can generate at maturity. The higher the net margins, and the higher and more sustained the top-line growth, the higher the P/S you can justify. You can get a good sense of things by looking at other companies in the sector. Remember that hope springs eternal, so always wise to be conservative in your estimates. I don't know AT1 that well, but I doubt it could get net margins of more than 10% (at best) at maturity, I also think it's a very competitive space, with a lot of well established and much larger players that will likely be launching competing products over the coming years. The covid narrative is appealing, but it's yet to be seen if they can genuinely capitalise..

Hi Strawman, Which assumptions do you have in your net margin estimates? At what level of P/S does it become unjustifiable? In general on AT1, I would say there is definitely a bit of COVID hype involved but I think the product they have is pretty flexible in that it can be used in many other blood test applications. And at least in their prospectus, they claim to have the best delivery-to-strip functionality and quite a bit of serious patents already approved or pending guarding the design... The moat they seemingly have could all but evaporate if those patents don't hold up though.

Like I say, I don't know enough about the business to speak with any confidence. But, in general, sustained net margins of 10% are about as good as it gets for most companies unless they have material pricing power or cost advantages. Resmed, for example, which i'd argue is of a far higher quality, manages a net margin of 15%. Medical device manufacturer MVP barely manages 5%. I'd be wary of a company trading on a P/S > 5 unless it has a huge market opportunity, significant sales momentum, and likely to deliver attractive operating leverage and net margins. As always, it's but one metric and you should always seek a holistic view.