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Genasys Inc. (NASDAQ:GNSS) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

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The Genasys Inc. (NASDAQ:GNSS) share price has done very well over the last month, posting an excellent gain of 26%. The annual gain comes to 114% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, there still wouldn't be many who think Genasys' price-to-earnings (or "P/E") ratio of 22.5x is worth a mention when the median P/E in the United States is similar at about 21x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been advantageous for Genasys as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Genasys

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Keen to find out how analysts think Genasys' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Genasys' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Genasys' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 320% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 66% as estimated by the dual analysts watching the company. Meanwhile, the broader market is forecast to expand by 18%, which paints a poor picture.

In light of this, it's somewhat alarming that Genasys' P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Bottom Line On Genasys' P/E

Genasys' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Genasys currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Genasys (2 shouldn't be ignored) you should be aware of.

Of course, you might also be able to find a better stock than Genasys. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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