Subdued Growth No Barrier To MaxLinear, Inc.'s (NASDAQ:MXL) Price
MaxLinear, Inc.'s (NASDAQ:MXL) price-to-earnings (or "P/E") ratio of 22x 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 15x and even P/E's below 8x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.
With earnings growth that's superior to most other companies of late, MaxLinear has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
Check out our latest analysis for MaxLinear
Keen to find out how analysts think MaxLinear's future stacks up against the industry? In that case, our free report is a great place to start.
Is There Enough Growth For MaxLinear?
There's an inherent assumption that a company should outperform the market for P/E ratios like MaxLinear's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 190%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Looking ahead now, EPS is anticipated to climb by 11% each year during the coming three years according to the twelve analysts following the company. Meanwhile, the rest of the market is forecast to expand by 9.8% per annum, which is not materially different.
With this information, we find it interesting that MaxLinear is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of MaxLinear's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
We don't want to rain on the parade too much, but we did also find 2 warning signs for MaxLinear that you need to be mindful of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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