Does Alpha and Omega Semiconductor Limited’s (NASDAQ:AOSL) PE Ratio Signal A Buying Opportunity?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to learn about the link between company’s fundamentals and stock market performance.
Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) is trading with a trailing P/E of 17.7x, which is lower than the industry average of 19.1x. While AOSL might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
See our latest analysis for Alpha and Omega Semiconductor
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for AOSL
Price-Earnings Ratio = Price per share ÷ Earnings per share
AOSL Price-Earnings Ratio = $10.57 ÷ $0.597 = 17.7x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to AOSL, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 17.7, AOSL’s P/E is lower than its industry peers (19.1). This implies that investors are undervaluing each dollar of AOSL’s earnings. This multiple is a median of profitable companies of 25 Semiconductor companies in US including Daqo New Energy, Amtech Systems and Micron Technology. You can think of it like this: the market is suggesting that AOSL is a weaker business than the average comparable company.
A few caveats
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. The first is that our “similar companies” are actually similar to AOSL, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with AOSL, 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 AOSL to are fairly valued by the market. If this does not hold true, AOSL’s lower P/E ratio may be because firms in our peer group are 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 add more of AOSL to your portfolio. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for AOSL’s future growth? Take a look at our free research report of analyst consensus for AOSL’s outlook.
Past Track Record: Has AOSL 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 AOSL’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
