Is Sophos Group plc’s (LON:SOPH) Growth Strong Enough To Justify Its September Share Price?

Sophos Group plc (LON:SOPH) closed yesterday at £3.914, which left some investors asking whether the high earnings potential can still be justified at this price. Below I will be talking through a basic metric which will help answer this question.

Check out our latest analysis for Sophos Group

How is Sophos Group going to perform in the future?

Sophos Group’s extremely high growth potential in the near future is attracting investors. The consensus forecast from 11 analysts is extremely positive with earnings per share estimated to rise from today’s level of $0.0565 to $0.107 over the next three years. On average, this leads to a growth rate of 30% each year, which illustrates a highly optimistic outlook in the near term.

Is SOPH available at a good price after accounting for its growth?

Sophos Group is trading at price-to-earnings (PE) ratio of 85.64x, this also tells us the stock is overvalued based on current earnings compared to the Software industry average of 31.11x , and overvalued compared to the GB market average ratio of 16.13x .

LSE:SOPH Price Estimation Relative to Market, September 10th 2019
LSE:SOPH Price Estimation Relative to Market, September 10th 2019

We already know that SOPH appears to be overvalued when compared to its industry average. However, seeing as Sophos Group is perceived as a high-growth stock, we must also account for its earnings growth, which is captured in the PEG ratio. A PE ratio of 85.64x and expected year-on-year earnings growth of 30% give Sophos Group a quite high PEG ratio of 2.87x. Based on this growth, Sophos Group’s stock can be considered overvalued , based on fundamental analysis.

What this means for you:

SOPH’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, 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 PEG 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:

  1. Financial Health: Are SOPH’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has SOPH 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 SOPH’s historicals for more clarity.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.