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How Does ANGI Homeservices's (NASDAQ:ANGI) P/E Compare To Its Industry, After The Share Price Drop?

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  • ANGI

To the annoyance of some shareholders, ANGI Homeservices (NASDAQ:ANGI) shares are down a considerable 39% in the last month. And that drop will have no doubt have some shareholders concerned that the 68% share price decline, over the last year, has turned them into bagholders. For those wondering, a bagholder is someone who keeps holding a losing stock indefinitely, without taking the time to consider its prospects carefully, going forward.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for ANGI Homeservices

Does ANGI Homeservices Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 71.90 that there is some investor optimism about ANGI Homeservices. As you can see below, ANGI Homeservices has a much higher P/E than the average company (20.8) in the interactive media and services industry.

NasdaqGS:ANGI Price Estimation Relative to Market, March 25th 2020
NasdaqGS:ANGI Price Estimation Relative to Market, March 25th 2020

That means that the market expects ANGI Homeservices will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

ANGI Homeservices shrunk earnings per share by 57% over the last year. But EPS is up 30% over the last 3 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting ANGI Homeservices's P/E?

The extra options and safety that comes with ANGI Homeservices's US$145m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On ANGI Homeservices's P/E Ratio

With a P/E ratio of 71.9, ANGI Homeservices is expected to grow earnings very strongly in the years to come. Falling earnings per share is probably keeping traditional value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will. Given ANGI Homeservices's P/E ratio has declined from 117.3 to 71.9 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: ANGI Homeservices may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.