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The Smith Micro Software, Inc. (NASDAQ:SMSI) share price has done very well over the last month, posting an excellent gain of 26%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.6% in the last twelve months.
Following the firm bounce in price, Smith Micro Software's price-to-earnings (or "P/E") ratio of 26.5x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 19x and even P/E's below 10x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Smith Micro Software as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Smith Micro Software will help you uncover what's on the horizon.
Is There Enough Growth For Smith Micro Software?
The only time you'd be truly comfortable seeing a P/E as high as Smith Micro Software's is when the company's growth is on track to outshine the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 41%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 28% over the next year. That's not great when the rest of the market is expected to grow by 13%.
In light of this, it's alarming that Smith Micro Software's P/E sits above 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 at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.
The Bottom Line On Smith Micro Software's P/E
Smith Micro Software shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Smith Micro Software's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
It is also worth noting that we have found 3 warning signs for Smith Micro Software that you need to take into consideration.
Of course, you might also be able to find a better stock than Smith Micro Software. 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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