Revolution Medicines Has a Market Cap of $29 Billion and Generates No Revenue. Here's Why Its Valuation May Not Be as Ridiculous as It Seems

If a stock has a market cap of nearly $30 billion, you would probably expect its business to be well developed, generating significant revenue, and likely profitable. But there's one stock trading at a valuation that not only isn't profitable but also isn't generating any revenue right now: Revolution Medicines (NASDAQ: RVMD).

In the past 12 months, its shares have skyrocketed more than 250%. It's been a hot stock to own, even though, from a fundamental approach, it doesn't appear to have much to back up its hefty valuation. And while its valuation is incredibly high, it may not necessarily be all that ridiculous when you consider the long-term growth potential it possesses.

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Revolution has some highly promising assets in its portfolio

Although the company doesn't have an approved product in its portfolio just yet, it's getting close to that stage. Daraxonrasib is an exciting drug that has shown incredible potential in treating pancreatic cancer. In a recent clinical study, it appeared to significantly extend patients' lives. Those who took chemotherapy lived an average of 6.7 months, whereas the median survival for patients taking daraxonrasib was 13.2 months.

Analysts project that daraxonrasib's peak sales could top more than $7 billion. The company also has other cancer drugs, zoldonrasib and elironrasib, which may generate billions in additional revenue. Thus, its valuation may start to look much more reasonable given all that potential growth.

Has Revolution Medicines' stock become too expensive to buy right now?

There's a lot of excitement around Revolution Medicines' stock today, but the danger is that investors may be pricing in too much future growth already. If you look at its possible revenue being upwards of $10 billion or more, you may conclude that at just three times its future revenue (or perhaps even less), it's not all that expensive.

But it could take many years for the business to get to the stage where its revenue becomes that large. And that isn't factoring in what its profit will be like, how much cash it might be burning through, and how many shares it will need to issue to facilitate its growth. Plus, there's also the uncertainty around whether all of its promising drugs will obtain approval and whether those rosy analyst estimates will prove to be correct.

There's simply a ton of uncertainty around the business, far too much for the stock to be worth its current valuation. The problem with buying the stock at its current level is that there's virtually no margin of safety, and the danger is that if anything goes wrong, the pharma stock may be due for a steep decline. While Revolution Medicines' valuation may be somewhat justifiable, it's certainly not low, and buying the stock at its current price comes with significant risks.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.