There's Reason For Concern Over Silicon Laboratories Inc.'s (NASDAQ:SLAB) Massive 33% Price Jump
Silicon Laboratories Inc. (NASDAQ:SLAB) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.
Following the firm bounce in price, Silicon Laboratories may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 69.9x, since almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
With earnings that are retreating more than the market's of late, Silicon Laboratories has been very sluggish. 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.
View our latest analysis for Silicon Laboratories
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Silicon Laboratories.
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Silicon Laboratories would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.1%. 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. 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 217% as estimated by the ten analysts watching the company. Meanwhile, the broader market is forecast to expand by 10%, which paints a poor picture.
With this information, we find it concerning that Silicon Laboratories is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.
The Bottom Line On Silicon Laboratories' P/E
Shares in Silicon Laboratories have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Silicon Laboratories currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Silicon Laboratories (at least 1 which can't be ignored), and understanding these should be part of your investment process.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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.
