Is Criteo SA.’s (NASDAQ:CRTO) PE Ratio A Signal To Sell For Investors?
Criteo SA. (NASDAQ:CRTO) is trading with a trailing P/E of 18.6x, which is higher than the industry average of 15.1x. While this makes CRTO appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Criteo
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for CRTO
Price-Earnings Ratio = Price per share ÷ Earnings per share
CRTO Price-Earnings Ratio = $26.07 ÷ $1.4 = 18.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to CRTO, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. CRTO’s P/E of 18.6x is higher than its industry peers (15.1x), which implies that each dollar of CRTO’s earnings is being overvalued by investors. As such, our analysis shows that CRTO represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your CRTO shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CRTO. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with CRTO, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing CRTO to are fairly valued by the market. If this does not hold, there is a possibility that CRTO’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in CRTO. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for CRTO’s future growth? Take a look at our free research report of analyst consensus for CRTO’s outlook.
Past Track Record: Has CRTO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CRTO’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
