With shares of Axsome Therapeutics (AXSM 0.71%) skyrocketing 87% so far this year, the biotech's shareholders are doubtlessly pleased. Thanks to a pair of newly approved products, growth is finally on the way -- with revenue set to go from practically $0 to more than $100 million in the course of a year.

But has the market already priced in the expected sales gains, and is the stock valued at a level where investors should be comfortable buying it? Let's answer these questions by looking at the bull case for the stock, and then contrast that with the bears' outlook to see which argument makes more sense. 

Two recent approvals should see revenue skyrocket

The bull thesis for Axsome is that it's going to have a lot of new revenue coming online in 2023, which the company will then build upon over the years that follow. Considering that it made $0 in sales during 2021 and $16.8 million in Q3, there's reason to believe the bulls are correct.

The biggest piece of evidence supporting the bull view is that the company chalked up two new approvals in the middle of this year from regulators at the Food and Drug Administration (FDA), clearing the way for it to begin commercializing both drugs. There's Auvelity, a novel pharmaceutical treatment for major depressive disorder (MDD), and Sunosi, which treats excessive daytime sleepiness in people with narcolepsy.

Management claims that both drugs could ultimately be worth more than $1 billion in revenue per year at their peak sales. There's also the potential to expand the indications for both Auvelity and Sunosi so that they can be marketed for conditions like attention deficit hyperactivity disorder (ADHD), which would increase their revenue-generating potential even further through the rest of the decade.

Other than those programs, the biotech has a pipeline packed with late-stage projects. In particular, its AXS-05 candidate to treat agitation in the context of Alzheimer's disease reported favorable results in its phase 3 trial. While there's still more work in clinical trials to be done before AXS-05 is ready for regulatory review and potential commercialization, the program could be a boon for shareholders if it continues to report positive data, as Alzheimer's disease is generally a very challenging niche for drug development. 

Valuation is a risk

The bear case against buying Axsome is that its valuation is currently so inflated by the anticipation of future revenue that investors who buy the stock today are liable to pay far too much for it, potentially setting themselves up for big losses. 

At the moment, Axsome's price-to-sales (P/S) multiple is up in the clouds at 86. The average P/S multiple in the biotech industry is close to 9, which makes the stock look outrageously expensive. But few biotech businesses are in the process of commercializing two medicines for the first time, so the comparison with the average is bound to be somewhat imperfect. 

On average, Wall Street analysts expect the business to bring in $184.1 million next year. If we take its current market capitalization of $2.4 billion and divide it by next year's revenue, we get a forward P/S ratio of 13.4. That valuation looks a lot more reasonable, even if it's a bit higher than the industry's average. And even if the revenue estimate is off by $10 million or so in either direction, the adjusted calculation will still indicate that the stock isn't horrendously overpriced. 

So the valuation element of the bear thesis isn't very convincing given what the company is likely to make over the coming year. Of course, there is the risk that the commercialization of Sunosi and Auvelity fails to live up to expectations as a result of poor uptake among healthcare providers or a bad reception from patients. But right now, there isn't much evidence to suggest that will happen.

Which case is more compelling?

Overall, the bullish argument is more plausible as the stock's valuation isn't so inflated that a correction is inevitable given what we can reasonably expect it to make in revenue over the next year. That doesn't necessarily mean you should be rushing to buy Axsome, however. 

In the long term, it'll need to keep commercializing new medicines if it wants to keep growing its revenue, and there's always the risk of failure in clinical trials. In other words, you should probably consider the Axsome of today a bit less risky than your average biotech stock, but still significantly more risky than a larger and more mature biopharma business with a handful of products on the market.