Should You Be Tempted To Buy QuinStreet Inc (NASDAQ:QNST) Because Of Its PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.
QuinStreet Inc (NASDAQ:QNST) is trading with a trailing P/E of 39x, which is lower than the industry average of 41.4x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
See our latest analysis for QuinStreet
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for QNST
Price-Earnings Ratio = Price per share ÷ Earnings per share
QNST Price-Earnings Ratio = $13.4 ÷ $0.343 = 39x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 QNST, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 39, QNST’s P/E is lower than its industry peers (41.4). This implies that investors are undervaluing each dollar of QNST’s earnings. This multiple is a median of profitable companies of 25 Internet companies in US including CathayOnline, InsPro Technologies and Glowpoint. One could put it like this: the market is pricing QNST as if it is a weaker company than the average company in its industry.
Assumptions to be aware of
However, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to QNST, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with QNST, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing QNST to are fairly valued by the market. If this does not hold true, QNST’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to QNST. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 QNST’s future growth? Take a look at our free research report of analyst consensus for QNST’s outlook.
Past Track Record: Has QNST 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 QNST’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.
