MicroStrategy Incorporated’s (NASDAQ:MSTR) price-to-earnings (or “P/E”) ratio of 55.5x 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 19x and even P/E’s below 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it’s justified.
There hasn’t been much to differentiate MicroStrategy’s and the market’s retreating earnings lately. It might be that many expect the company’s earnings to strengthen positively despite the tough market conditions, which has kept the P/E from falling. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
Check out our latest analysis for MicroStrategy
Does Growth Match The High P/E?
The only time you’d be truly comfortable seeing a P/E as steep as MicroStrategy’s is when the company’s growth is on track to outshine the market decidedly.
If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 2.2%. The last three years don’t look nice either as the company has shrunk EPS by 65% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 39% per annum during the coming three years according to the lone analyst following the company. With the market only predicted to deliver 13% per annum, the company is positioned for a stronger earnings result.
With this information, we can see why MicroStrategy is trading at such a high P/E compared to the market. Apparently shareholders aren’t keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of MicroStrategy’s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. It’s hard to see the share price falling strongly in the near future under these circumstances.
It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 1 warning sign with MicroStrategy, and understanding should be part of your investment process.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.
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