Stamps.com Inc.'s (NASDAQ:STMP) price-to-earnings (or "P/E") ratio of 72.5x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
With earnings that are retreating more than the market's of late, Stamps.com 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Stamps.com.
Is There Enough Growth For Stamps.com?
In order to justify its P/E ratio, Stamps.com 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 54%. This means it has also seen a slide in earnings over the longer-term as EPS is down 37% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the three analysts covering the company are not good at all, suggesting earnings should decline by 13% over the next year. The market is also set to see earnings decline 4.6% but the stock is shaping up to perform materially worse.
With this information, it's strange that Stamps.com is trading at a higher P/E in comparison. With earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. There's strong potential for the P/E to fall to lower levels if the company doesn't improve its profitability.
The Bottom Line On Stamps.com's P/E
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Stamps.com's analyst forecasts revealed that its even shakier outlook against the market isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook, we suspect the share price is at risk of declining, sending the high P/E lower. In addition, we would be concerned whether the company can even maintain this level of performance under these tough market conditions. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Plus, you should also learn about these 2 warning signs we've spotted with Stamps.com.
You might be able to find a better investment than Stamps.com. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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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